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Currency Substitution, Unoffical Dollarization and Estimates of Foreign Currency Held Abroad: The Case of Croatia

Author

Listed:
  • Edgar L. Feige

    (The University of Wisconsin-Madison)

  • Michael Faulend

    (Croatian National Bank)

  • Velimir Sonje

    (Croatian National Bank)

  • Vedran Sosic

    (Croatian National Bank)

Abstract

This paper employs new estimates of US currency held abroad to determine the degree of unofficial or de facto dollarization that has taken place in key countries around the world. Empirical estimates of foreign currency in circulation permits refined definitions of unofficial dollarization indices as well as new measures of currency and asset substitution and bank credibility indices. The new unofficial dollarization indices are compared to the commonly used IMF dollarization measures and are shown to be superior. The paper then examines the problem of estimating the unobserved amounts of European currencies [particularly the Deutsche mark (DM)] that circulate as second currencies in many Central and Eastern European nations. A denomination displacement method and a money demand method are employed to estimate the unobserved quantity of DM circulating in Croatia. The final section calls attention to the importance of monitoring the historic experiment that will take place when the Euro currency is introduced on January 1, 2002. In particular, it calls for a data collection mechanism capable of measuring the extent to which the new Euro currency substitutes for the local currencies of Central and Eastern European transition countries.

Suggested Citation

  • Edgar L. Feige & Michael Faulend & Velimir Sonje & Vedran Sosic, 2001. "Currency Substitution, Unoffical Dollarization and Estimates of Foreign Currency Held Abroad: The Case of Croatia," International Finance 0106001, EconWPA.
  • Handle: RePEc:wpa:wuwpif:0106001
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    Citations

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    Cited by:

    1. Helmut Stix, 2001. "Survey Results about Foreign Currency Holdings in Five Central and Eastern European Countries," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 2(3), pages 41-48, February.
    2. Kessy, Pantaleo, 2011. "Dollarization in Tanzania: empirical evidence and cross-country experience," LSE Research Online Documents on Economics 36381, London School of Economics and Political Science, LSE Library.
    3. Seater, John J., 2008. "The Demand for Currency Substitution," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 2, pages 1-30.
    4. John Murray & James Powell, 2002. "Dollarization in Canada: The Buck Stops There," Technical Reports 90, Bank of Canada.
    5. Buiter, Willem H., 2009. "Negative nominal interest rates: Three ways to overcome the zero lower bound," The North American Journal of Economics and Finance, Elsevier, vol. 20(3), pages 213-238, December.
    6. Lubos Komarek & Martin Melecky, 2001. "Currency Substitution in the Czech Republic 1993-2001," Archive of Monetary Policy Division Working Papers 2001/40, Czech National Bank.
    7. Murray, John & Powell, James, 2003. "Dollarization in Canada: where does the buck stop?," The North American Journal of Economics and Finance, Elsevier, vol. 14(2), pages 145-172, August.
    8. Lubo Komrek & Martin Meleck, 2004. "Money Demand in an Open Transition Economy," Eastern European Economics, Taylor & Francis Journals, vol. 42(5), pages 73-73, September.
    9. Edgar L. Feige, 2003. "The Dynamics of Currency Substitution, Asset Substitution and De facto Dollarization and Euroization in Transition Countrieses," Macroeconomics 0305003, EconWPA.
    10. Valev, Neven T., 2010. "The hysteresis of currency substitution: Currency risk vs. network externalities," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 224-235, March.
    11. Ainura Uzagalieva, 2005. "Fiscal Consequences of Monetary Integration within the Common Economic Area: the Case of Belarus, Kazakhstan and Russia," CERGE-EI Working Papers wp254, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    12. Shinkevich Andrey, 2002. "Dollarization Hysteresis in Russia," EERC Working Paper Series 00-087e, EERC Research Network, Russia and CIS.
    13. Edgar Feige & James Dean, 2002. "Dollarization and Euroization in Transition Countries: Currency Substitution, Asset Substitution, Network Externalities and Irreversibility," International Finance 0205003, EconWPA.
    14. Oomes, Nienke & Ohnsorge, Franziska, 2005. "Money demand and inflation in dollarized economies: The case of Russia," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 462-483, September.
    15. Yinusa D. O. & A. E. Akinlo, 2008. "Exchange Rate Volatility and the Extent of Currency Substitution in Nigeria," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 43(2), pages 161-181, December.
    16. Ivan Milenković & Milivoje Davidović, 2013. "Determinants of Currency Substitution/Dollarization – The Case of the Republic of Serbia," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 2(1), pages 139-155.
    17. Vedran Sosic & Michael Faulend, 2002. "Dollarisation and the Underground Economy: Accidental Partners?," Occasional paper series 15, Institute of Public Finance.
    18. 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.
    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.

    More about this item

    Keywords

    Currency Substitution; Unofficial Dollarization; Defacto dollarization; asset substitution; exchange rate policy; Euro currency; foreign currency circulating abroad; irreversibility; hysteresis; network externalities.;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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