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Unofficial Dollarization in Latin America: Currency Substitution, Network Externalities and Irreversibility

Author

Listed:
  • Edgar L. Feige

    (The University of Wisconsin-Madison)

  • Vedran Šošiæ

    (Croatian National Bank)

  • Michael Faulend

    (Croatian National Bank)

  • Velimir Šonje

    (Reifseinen Bank)

Abstract

We examine the extent, causes and consequences of the use of foreign currency as a co-circulating medium of exchange and store of value in Latin America. Using new estimates of the amount of foreign currency in circulation in the form of US dollars, we obtain unique measures of currency substitution, asset substitution, dollarization, and bank credibility for many Latin American countries. We also specify and estimate demand functions for foreign currency in circulation in Argentina in order to examine the dynamic consequences of network externalities for hysteresis and irreversibility.

Suggested Citation

  • Edgar L. Feige & Vedran Šošiæ & Michael Faulend & Velimir Šonje, 2002. "Unofficial Dollarization in Latin America: Currency Substitution, Network Externalities and Irreversibility," International Finance 0205002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0205002
    Note: Type of Document - Acrobat PDF; prepared on IBM PC ; to print on HP/PostScript; pages: 28 ; figures: included. Forthcoming in James W. Dean, Dominick Salvatore and Thomas Willett, eds. The Dollarization Debate, New York: Oxford University Press, 2002
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/if/papers/0205/0205002.pdf
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    References listed on IDEAS

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    1. Ricardo Hausmann & Michael Gavin & Carmen Pagés-Serra & Ernesto H. Stein, 1999. "Financial Turmoil and Choice of Exchange Rate Regime," Research Department Publications 4170, Inter-American Development Bank, Research Department.
    2. Edgar L. Feige, 2005. "Overseas Holdings Of U.S.Currency And The Underground Economy," Macroeconomics 0501022, University Library of Munich, Germany.
    3. Pablo E. Guidotti & Carlos A. Rodriguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 518-544, September.
    4. Ricardo Hausmann & Michael Gavin & Carmen Pagés & Ernesto H. Stein, 1999. "Financial Turmoil and the Choice of Exchange Rate Regime," IDB Publications (Working Papers) 4128, Inter-American Development Bank.
    5. Feige, Edgar L., 1997. "Revised estimates of the Underground Economy: Implications of US Currency held abroad," MPRA Paper 13805, University Library of Munich, Germany.
    6. Edgar L. Feige, 2005. "The Anatomy Of The Underground Economy," Macroeconomics 0502011, University Library of Munich, Germany.
    7. Susan Pozo (ed.), 1996. "Exploring the Underground Economy," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number eue, November.
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    Cited by:

    1. repec:ilo:ilowps:487892 is not listed on IDEAS
    2. Kenneth P. Jameson, 2003. "Is It Possible to De-Dollarize? : The Case of Ecuador," International Journal of Political Economy, Taylor & Francis Journals, vol. 33(1), pages 42-60.
    3. Adenutsi, Deodat E., 2007. "The policy dilemma of economic openness and seigniorage-maximizing inflation in dollarised developing countries: The Ghanaian experience," MPRA Paper 37134, University Library of Munich, Germany.
    4. 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.
    5. Stix, Helmut, 2013. "Why do people save in cash? Distrust, memories of banking crises, weak institutions and dollarization," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4087-4106.
    6. Khou, Vouthy. & Cheng, Oudom. & Leng, Soklong. & Meng, Channarith., 2015. "Role of the Central Bank in supporting economic diversification and productive employment in Cambodia," ILO Working Papers 994878923402676, International Labour Organization.
    7. Pang, Xiaobo & Huang, Weiting, 2005. "货币替代中的价值效应与网络效应 [Value effect and network effect in the process of currency substitution]," MPRA Paper 11627, University Library of Munich, Germany, revised May 2007.
    8. Garcia Rocabado, Daniel, 2010. "The road to monetary union in Latin America: An EMS-type fixed exchange rate system as an intermediate step," W.E.P. - Würzburg Economic Papers 85, University of Würzburg, Department of Economics.
    9. Nannette Lindenberg & Frank Westermann, 2012. "How strong is the case for dollarization in Central America? An empirical analysis of business cycles, credit market imperfections and the exchange rate," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 17(2), pages 147-166, April.
    10. Buffie, Edward F. & Airaudo, M. & Zanna, Felipe, 2018. "Inflation targeting and exchange rate management in less developed countries," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 159-184.
    11. Thomas Scheiber & Caroline Stern, 2016. "Currency substitution in CESEE: why do households prefer euro payments?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 73-98.
    12. Helmut Stix, 2008. "Euroization: What Factors drive its Persistence?," Working Papers 140, Oesterreichische Nationalbank (Austrian Central Bank).
    13. Edgar Feige & James Dean, 2002. "Dollarization and Euroization in Transition Countries: Currency Substitution, Asset Substitution, Network Externalities and Irreversibility," International Finance 0205003, University Library of Munich, Germany.
    14. Adenutsi, Deodat E. & Yartey, Charles A., 2007. "Financial sector development and the macrodynamics of ‘de facto’ dollarisation in developing countries: the case of Ghana," MPRA Paper 29333, University Library of Munich, Germany.

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    More about this item

    Keywords

    unofficial de facto dollarization; Latin America; currency substitution; asset substitution; foreign currency; network externalities; Argentina; irreversibility; underground economy;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • P2 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies
    • P3 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions

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