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Dollarization in transition economies: Evidence and policy implications

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  • Sahay, Ratna
  • Vegh, Carlos

Abstract

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.

Suggested Citation

  • Sahay, Ratna & Vegh, Carlos, 1995. "Dollarization in transition economies: Evidence and policy implications," MPRA Paper 20490, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:20490
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. John Duffy & Maxim Nikitin, 2004. "Dollarization Traps," Econometric Society 2004 Latin American Meetings 196, Econometric Society.
    2. Vetlov, Igor, 2001. "Dollarization in Lithuania : An econometric approach," BOFIT Discussion Papers 1/2001, Bank of Finland, Institute for Economies in Transition.
    3. International Monetary Fund, 2002. "Macroeconomic Adjustment in a Highly Dollarized Economy; The Case of Cambodia," IMF Working Papers 02/92, International Monetary Fund.
    4. Samreth, Sovannroeun, 2011. "An empirical study on the hysteresis of currency substitution in Cambodia," Journal of Asian Economics, Elsevier, vol. 22(6), pages 518-527.
    5. van Wijnbergen, Sweder & Budina, Nina, 2001. "Inflation Stabilization, Fiscal Deficits, and Public Debt Management in Poland," Journal of Comparative Economics, Elsevier, vol. 29(2), pages 293-309, June.
    6. Claudia Buch, 2001. "Money demand in Hungary and Poland," Applied Economics, Taylor & Francis Journals, vol. 33(8), pages 989-999.
    7. Harrison, Barry & Vymyatnina, Yulia, 2007. "Currency substitution in a de-dollarizing economy : the case of Russia," BOFIT Discussion Papers 3/2007, Bank of Finland, Institute for Economies in Transition.
    8. Isakova, Asel, 2010. "Currency substitution in the economies of Central Asia : how much does it cost?," BOFIT Discussion Papers 14/2010, Bank of Finland, Institute for Economies in Transition.
    9. Dean, James W., 2001. "Should Latin America's common law marriages to the US dollar be legalized? Should Canada's?," Journal of Policy Modeling, Elsevier, vol. 23(3), pages 291-300, April.
    10. Henrik Müller, 1999. "From dollarisation to euroisation," Intereconomics: Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 34(6), pages 286-296, November.
    11. Asel Isakova, 2010. "Currency Substitution in the Economies of Central Asia: How Much Does it Cost?," Chapters,in: The Euro and Economic Stability, chapter 9 Edward Elgar Publishing.
    12. Helene Poirson Ward, 2001. "How Do Countries Choose their Exchange Rate Regime?," IMF Working Papers 01/46, International Monetary Fund.
    13. Sarajevs, Vadims, 2000. "Money shocks in a small open economy with dollarization, factor price rigidities and nontradeables," BOFIT Discussion Papers 12/2000, Bank of Finland, Institute for Economies in Transition.
    14. Komárek Luboš & Melecký Martin, 2001. "Demand for Money in the Transition Economy : The Case of the Czech Republic 1993–2001," The Warwick Economics Research Paper Series (TWERPS) 614, University of Warwick, Department of Economics.
    15. Oscar Lora Rocha, 1999. "Ventajas de mantener la moneda nacional en Bolivia," Revista de Análisis del BCB, Banco Central de Bolivia, vol. 2(2), pages 41-86, December.
    16. Paul Mizen, 1996. "The behavior of foreign currency holdings during currency crises: Causes and consequences," Open Economies Review, Springer, vol. 7(1), pages 651-673, March.
    17. repec:taf:rjapxx:v:13:y:2008:i:2:p:131-146 is not listed on IDEAS
    18. Broda, Christian & Yeyati, Eduardo Levy, 2006. "Endogenous Deposit Dollarization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 963-988, June.
    19. Komárek Luboš & Melecký Martin, 2001. "Currency Substitution in the Transition Economy : A Case of the Czech Republic 1993-2001," The Warwick Economics Research Paper Series (TWERPS) 613, University of Warwick, Department of Economics.
    20. Luoana D. Santarossa, 2001. "Arrears as a Sign of Financial Repression in Transition Economies - The Case of Romania," CERT Discussion Papers 0104, Centre for Economic Reform and Transformation, Heriot Watt University.
    21. repec:eee:ecmode:v:66:y:2017:i:c:p:146-155 is not listed on IDEAS
    22. Fridman Alla & Verbetsky Aleksey, 2001. "Currency Substitution in Russia," EERC Working Paper Series 01-05e, EERC Research Network, Russia and CIS.
    23. Velimir Šonje & Boris Vujčić, 1999. "Croatia In the Second Stage of Transition 1994–1999," Working Papers 1, The Croatian National Bank, Croatia.

    More about this item

    Keywords

    currency substitution; dollarization; transition economies; stabilization; inflation;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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