The Dynamics of Currency Substitution, Asset Substitution and De Facto Dollarization and Euroization in Transition Countries

Comparative Economic Studies, 2003

35 Pages Posted: 17 Jun 2019

See all articles by Edgar L. Feige

Edgar L. Feige

University of Wisconsin - Madison - Department of Economics

Date Written: september 2003

Abstract

This paper presents new evidence on the dynamics of dollarization and euroization for twenty-five transition countries. Estimates of the amount of foreign currency in circulation (FCC) in transition countries are used to develop a new comprehensive dollarization index (CDI) and separate indices of currency substitution (CSI) and asset substitution (ASI). When the CDI is compared to the traditional dollarization index (DI) that relies solely on foreign currency deposits as a proxy for the extent of dollarization, I find that the comprehensive dollarization measure provides a more complete picture of the extent of de facto dollarization and euroization, and that it better reflects the separate influences of currency substitution and asset substitution. I find that the dynamic evolution of currency substitution and asset substitution in transition countries is both more variable and complex than is usually believed to be the case.

These new dollarization indicators enable researchers to examine the causes of the dollarization process and its tendency to lead to irreversibility (hysteresis). Moreover, the currency substitution and asset substitution indices shed light on the dynamic consequences of these processes for the effectiveness of monetary policy. Finally, the new estimates of FCC make possible the measurement of effective currency/deposit ratios that can be used to develop new estimates of the size and growth of underground economies in transition countries.

Keywords: dollarization, euroization, transition economies, currency substitution, asset substitution, underground economies, foreign currency, network externalities, irreversibility

JEL Classification: F3, E26, E41, E42, E5, O17, K4,P2, P3

Suggested Citation

Feige, Edgar L., The Dynamics of Currency Substitution, Asset Substitution and De Facto Dollarization and Euroization in Transition Countries (september 2003). Comparative Economic Studies, 2003, Available at SSRN: https://ssrn.com/abstract=3400232 or http://dx.doi.org/10.2139/ssrn.3400232

Edgar L. Feige (Contact Author)

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States

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