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Dollarization in transition economies: Evidence and policy implications

  • Sahay, Ratna
  • Vegh, Carlos

After most restrictions on foreign currency holdings were relaxed in the early 1990s, foreign currency deposits in transition economies have been increasing rapidly. This paper takes a first look at the evidence on dollarization for 15 transition economies, and then discusses some key conceptual and policy implications. Depending on the institutional constraints, foreign currency deposits as a proportion of broad money reached a peak of between 30 and 60 percent in 1992-93. Unlike what has been observed in Latin America, however, dollarization has fallen substantially in the aftermath of successful stabilization plans in Estonia, Lithuania, Mongolia, and Poland. Since foreign currency deposits reflect mainly a portfolio choice, the fall in dollarization can be primarily attributed to higher real returns on domestic-currency assets, as a result of lower inflation and more market-determined interest rates.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20490.

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Date of creation: Sep 1995
Date of revision:
Handle: RePEc:pra:mprapa:20490
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  1. Vegh, Carlos A., 1989. "The optimal inflation tax in the presence of currency substitution," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 139-146, July.
  2. Dimitri G. Demekas & Mohsin S. Khan, 1991. "The Romanian Economic Reform Program," IMF Working Papers 91/80, International Monetary Fund.
  3. Alberto Giovannini & Bart Turtelboom, 1992. "Currency Substitution," NBER Working Papers 4232, National Bureau of Economic Research, Inc.
  4. repec:oup:qjecon:v:96:y:1981:i:2:p:207-22 is not listed on IDEAS
  5. Adam G. G. Bennett, 1993. "The Operation of the Estonian Currency Board," IMF Staff Papers, Palgrave Macmillan, vol. 40(2), pages 451-470, June.
  6. Rudiger Dornbusch & Ferico Sturzenegger & Holger Wolf, 1990. "Extreme Inflation: Dynamics and Stabilization," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 1-84.
  7. Mohamed El-Erian, 1988. "Currency Substitution in Egypt and the Yemen Arab Republic: A Comparative Quantitative Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 35(1), pages 85-103, March.
  8. Mohsin S. Khan & Pierre-Richard Agénor, 1992. "Foreign Currency Deposits and the Demand for Money in Developing Countries," IMF Working Papers 92/1, International Monetary Fund.
  9. Carlos A. Végh Gramont & Ratna Sahay, 1995. "Inflation and Stabilization in Transition Economies: A Comparison with Market Economies," IMF Working Papers 95/8, International Monetary Fund.
  10. Friedman, Benjamin M., 1990. "Targets and instruments of monetary policy," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 22, pages 1185-1230 Elsevier.
  11. Carlos A. Rodríguez, 1993. "Macroeconomic Developments in Romania," CEMA Working Papers: Serie Documentos de Trabajo. 90, Universidad del CEMA.
  12. Bijan B. Aghevli & Eduardo Borensztein & Tessa Van der Willigen, 1992. "Stabilization and Structural Reform in the Czech and Slovak Federal Republic: First Stage," IMF Occasional Papers 92, International Monetary Fund.
  13. Bufman, Gil & Leiderman, Leonardo, 1993. "Currency Substitution under Nonexpected Utility: Some Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 320-35, August.
  14. Carlos A. Végh Gramont & Alexander W. Hoffmaister, 1995. "Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis: Evidence From Uruguay," IMF Working Papers 95/99, International Monetary Fund.
  15. Steven B. Kamin & Neil R. Ericsson, 1993. "Dollarization in Argentina," International Finance Discussion Papers 460, Board of Governors of the Federal Reserve System (U.S.).
  16. Calvo, Guillermo A & Vegh, Carlos A, 1995. "Fighting Inflation with High Interest Rates: The Small Open Economy Case under Flexible Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 49-66, February.
  17. Thomas, Lee R, 1985. "Portfolio Theory and Currency Substitution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(3), pages 347-57, August.
  18. John Kareken & Neil Wallace, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 96(2), pages 207-222.
  19. Rudiger Dornbusch & Alejandro Reynoso, 1989. "Financial Factors in Economic Development," NBER Working Papers 2889, National Bureau of Economic Research, Inc.
  20. Johannes Mueller, 1994. "Dollarization in Lebanon," IMF Working Papers 94/129, International Monetary Fund.
  21. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-25, June.
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