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Dollarisation in the Former Soviet Union: from Hysteria to Hysteresis

Author

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  • Oleh Havrylyshyn

    (International Monetary Fund, European II Department, Room HQ 6-120, 700 19th street NW, Washington DC, 20431, USA.)

  • Christian H Beddies

    (International Monetary Fund, European II Department, Room HQ 6-120, 700 19th street NW, Washington DC, 20431, USA.)

Abstract

This paper reviews evidence of dollarisation in Former Soviet Union (FSU) countries, and finds that it is still very high, the well-known hysteresis effect. However high dollarisation – defined as the use of any foreign currency – is not only due to inertial lack of confidence. There is also some tentative evidence that suggests foreign currency is used – in both cash and deposit form – as one of the very few alternative instruments for portfolio diversification in an embryonic financial market. It is also shown that, contrary to the received wisdom, high dollarisation does not seriously impede effective conduct of monetary policy: money demand in FSU countries is stabilising, and the most important objective, meaningful inflation control, has been widely achieved. Thus, high dollarisation is not per se as damaging as often thought, and in fact has a beneficial dimension in promoting financial market development. Nonetheless, high dollarisation remains a concern since it provides mechanisms for magnifying vulnerabilities in the event of a crisis even if it might not be the direct cause of a crisis. This necessarily implies that some policy options (such as immediate exchange rate devaluation) are not viable or very costly in a crisis. Comparative Economic Studies (2003) 45, 329–357. doi:10.1057/palgrave.ces.8100018

Suggested Citation

  • Oleh Havrylyshyn & Christian H Beddies, 2003. "Dollarisation in the Former Soviet Union: from Hysteria to Hysteresis," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 45(3), pages 329-357, September.
    • Handle: RePEc:pal:compes:v:45:y:2003:i:3:p:329-357
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    Cited by:

    1. 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.
    2. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2014. "Addicted to Dollars," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 1-51, May.
    3. Kyriakos C. Neanidis & Christos S. Savva, 2006. "The Effects of Uncertainty on Currency Substitution and Inflation: Evidence from Emerging Economies," Economics Discussion Paper Series 0609, Economics, The University of Manchester.
    4. Nienke Oomes, 2003. "Network Externalities and Dollarization Hysteresis: The Case of Russia," IMF Working Papers 2003/096, International Monetary Fund.
    5. Radostin Neykov & Caroline Robert, 2021. "The Role of the Euro in the Eastern Partnership Countries," European Economy - Discussion Papers 138, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    6. Gaetano Antinolfi & Claudia M. Landeo & Maxim Nikitin, 2007. "Dollarization and the inflation threshold," Canadian Journal of Economics, Canadian Economics Association, vol. 40(2), pages 628-649, May.
    7. Seater, John J., 2008. "The Demand for Currency Substitution," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 2, pages 1-30.
    8. Dan Galai & Zvi Wiener, 2012. "Credit Risk Spreads in Local and Foreign Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 883-901, August.
    9. Asel Isakova, 2010. "Currency Substitution in the Economies of Central Asia: How Much Does it Cost?," Chapters, in: Ewald Nowotny & Peter Mooslechner & Doris Ritzberger-Grünwald (ed.), The Euro and Economic Stability, chapter 9, Edward Elgar Publishing.
    10. repec:cuf:journl:y:2015:v:16:i:1:reinhart:rogoff:savastano is not listed on IDEAS
    11. repec:zbw:bofitp:2010_014 is not listed on IDEAS
    12. Erjon Luci & Marta Muco & Elvira Sojli, 2006. "Euroisation in Albania: From Spontaneous to Consensual," wiiw Balkan Observatory Working Papers 71, The Vienna Institute for International Economic Studies, wiiw.
    13. Olga Aslanidi, 2008. "Dollarization in Transition Economies: New Evidence from Georgia," CERGE-EI Working Papers wp366, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    14. Bitar, Joseph, 2021. "Foreign Currency Intermediation: Systemic Risk and Macroprudential Regulation," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 2(2).
    15. Works, Richard Floyd, 2016. "Econometric modeling of exchange rate determinants by market classification: An empirical analysis of Japan and South Korea using the sticky-price monetary theory," MPRA Paper 76382, University Library of Munich, Germany.
    16. Gurkan I. Akalin & Edmund L. Prater, 2015. "The Global Crisis of the Late 2000s and Currency Substitution: A Study of Three Eastern European Economies Russia, Turkey and Ukraine," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 4(2), pages 5-22.
    17. Jean-François Goux & Charbel Cordahi, 2007. "The international transmission of monetary shocks in a dollarized economy: The case of USA and Lebanon," Post-Print halshs-00174466, HAL.
    18. Clark, Ephraim & Kassimatis, Konstantinos, 2015. "Macroeconomic effects on emerging-markets sovereign credit spreads," Journal of Financial Stability, Elsevier, vol. 20(C), pages 1-13.
    19. 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 Emerging Economies (BOFIT).
    20. John Duffy & Maxim Nikitin, 2004. "Dollarization Traps," Econometric Society 2004 Latin American Meetings 196, Econometric Society.
    21. Michael Takudzwa Pasara & Rufaro Garidzirai, 2020. "The Boomerang Effects: An Analysis of the Pre and Post Dollarisation Era in Zimbabwe," Economies, MDPI, vol. 8(2), pages 1-20, April.

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