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What Causes Bank Asset Substitution In Kazakhstan? Explaining Currency Substitution In A Transition Economy

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  • Sharon Eicher

Abstract

Dollarization comes in several forms. The type that this paper examines is asset substitution, when savers hold dollar assets in bank accounts, instead of local currency. It is limited to the transition economy of Kazakhstan. This paper estimates demand for dollar accounts and shows that avoidance of inflation risk, rather than avoidance of exchange rate devaluation of savings, is the most important in explaining dollarization. This result is unexpected. This study examines data from Kazakhstan. Kazakhstan is seen as having a strong banking system and a healthy economy for a former Soviet Republic. It is seen as one of the most market-oriented, FSU countries. However, Kazakhstan also has a large demand for a means of storing savings in dollars, rather than in the local currency. This is particularly curious, when the local currency is appreciating relative to the U.S. dollar. This demand in less prosperous FSU countries is likely to be even greater. The paper combines data and statistical methods with anecdotal information in order to improve our understanding of a paradoxical occurrence.

Suggested Citation

  • Sharon Eicher, 2004. "What Causes Bank Asset Substitution In Kazakhstan? Explaining Currency Substitution In A Transition Economy," William Davidson Institute Working Papers Series 2004-688, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:2004-688
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    File URL: http://deepblue.lib.umich.edu/bitstream/2027.42/40074/3/wp688.pdf
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    Cited by:

    1. Mesut Yilmaz & Yessengali Oskenbayev & Kanat Abdulla, 2009. "Currency Substitution: A Case Of Kazakhstan (2000:1-2007:12)," William Davidson Institute Working Papers Series wp946, William Davidson Institute at the University of Michigan.
    2. Yilmaz, Mesut & Oskenbayev, Yessengali & Kanat, Abdulla, 2010. "Demand For Money In Kazakhstan: 2000-2007," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 118-129, March.

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