Hysteresis in a Simple Model of Currency Substitution PDF Download

Author: Martín Uribe
Publisher:
ISBN:
Category : Currency substitution
Languages : en
Pages : 40

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Author: Mr.Guillermo Calvo
Publisher: International Monetary Fund
ISBN: 145184588X
Category : Business & Economics
Languages : en
Pages : 32

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This paper reviews the main policy and analytical issues related to currency substitution in developing countries. The paper discusses, first, whether currency substitution should be encouraged or not; second, how the presence of currency substitution affects the choice of nominal anchors in inflation stabilization programs; third, the effects of changes in the rate of growth of the money supply on the real exchange rate; fourth, the interaction between inflationary finance and currency substitution; and, finally, issues related to the empirical verification of the currency substitution hypothesis.

Author: Paul Reding
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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It is a known fact that the use of foreign currency by domestic residents shows significance persistence, even hysteresis. Temporary changes in the inflation rate can have permanent effects on the degree of currency substitution, as illustrated by the case of Bolivia, where dollarization has remained at a particularly high level after stabilization. The paper presents a simple model of currency substitution with network effects among agents with heterogeneous transaction costs. A network of foreign currency users reduces transactions costs for all prospective users of this currency. The strength of the network effects increases with size, which is defined as the number of agents whose foreign currency balances are larger than a given threshold. The network's size is endogenously determined. Its dynamics and the possibility of multiple equilibria generate patterns of currency substitution which exhibit persistence and hysteresis.

Author: Saziye Gazioglu
Publisher:
ISBN:
Category : Currency substitution
Languages : en
Pages : 29

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Author: Neven T. Valev
Publisher:
ISBN:
Category :
Languages : en
Pages : 28

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It is widely documented that currency substitution (using foreign money in transactions) increases in periods of high inflation but does not decline once inflation is reduced. The paper uses survey data from Bulgaria, which experienced this phenomenon, to investigate the origins of this ratchet effect. We find that expected devaluation of the domestic currency, while relatively high, does not play a major role in sustaining the dollarization of transactions. Conversely, preferences for the use of foreign money are strongly influenced by people's perception that foreign money is already widely used in the economy.

Author: Eduardo A. Morón
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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The previous literature on dollarization processes has two basic problems. First is the poor empirical methods of measurement, and second is the lack of a clear definition of the phenomenon under study. Several methodological problems have not been successfully addressed. Foreign currency holdings cannot be measured directly, and the dollarization ratios are very imprecise as they do not take into account institutional considerations. We present a simple model in which monetary assets are held for two motives: transactions and a store of wealth. Based on the Divisia literature, the model emphasizes the difference in liquidity properties in different monetary assets. In a dollarized economy, this notion is particularly important as we can distinguish two separate phenomena: currency substitution and asset substitution. The first one is measured as the share of total liquidity obtained from dollar- denominated assets. The second one is not related to transactions and, therefore, is just the share of total financial assets that is held in dollar-denominated assets. The model predicts a close relationship between asset substitution and the interest rate differential and between currency substitution and the inflation rate differential. Using the Peruvian dollarization experience (1978-1996), we found significant evidence supporting these hypotheses. Furthermore, we reject the presence of hysteresis as the corrected currency substitution ratios are cointegrated with the inflation differential rate.

Author: Nienke Oomes
Publisher: International Monetary Fund
ISBN: 1451851936
Category : Business & Economics
Languages : en
Pages : 37

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Dollarization in Russia increased rapidly during the early 1990s, but failed to come down in the second half of the 1990s in spite of exchange rate stabilization. To explain this "dollarization hysteresis," this paper develops a model in which network externalities in the demand for currency can generate multiple stable steady states for the dollarization ratio. The model is estimated using a new source of data on dollar currency holdings in Russia. On the basis of these estimates, which confirm the existence of network externalities, the paper discusses several policies that could result in a permanent decrease in dollarization.

Author: Mr.Pablo Emilio Guidotti
Publisher: International Monetary Fund
ISBN: 1451941358
Category : Business & Economics
Languages : en
Pages : 32

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Book Description
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Author: Ia Eradze
Publisher: Taylor & Francis
ISBN: 1000719030
Category : Business & Economics
Languages : en
Pages : 232

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This volume engages with the roots, dimensions, and implications of foreign currency domination in states with a national currency. Referred to as unofficial dollarization in literature, this is a worldwide phenomenon among developing countries and has a long history. This monograph provides a political economic analysis of dollarization in Georgia and is structured around three themes: the genesis of dollarization (1991–2003), the persistence of dollarization (2003–12) and the politicization of dollarization (2012–19). The case of Georgia is especially representative of the post-socialist transition states, but also has wider applicability. A high level of dollarization is a significant barrier to economic growth, macroeconomic and political stability, functional monetary policy, as well as social welfare. The Covid-19 crisis and the increasing debt of developing countries in foreign currency exacerbate dollarization-related vulnerabilities for these economies. This book will be of interest to postgraduate students in global/comparative political economy, development economics or transition economies, researchers in monetary sovereignty, central banking, exchange rate policies, currency hierarchy, money, financialization, and policy makers in dollarized countries and global institutions.

Author: Guillermo A. Calvo
Publisher: MIT Press
ISBN: 9780262032360
Category : Business & Economics
Languages : en
Pages : 536

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Guillermo Calvo, who foresaw the financial crisis that followed the devaluationn of Mexico's peso, has spent much of his career thinking beyond the conventional wisdom. In a quiet and understated way, Calvo has made seminal contributions to several major research areas in macroeconomics, particularly monetary policy, exchange rates, public debt, and stabilization in Latin America and post-communist countries. Money, Exchange Rates, and Output brings together these contributions in a broad selection of the author's work over the past two decades. There are introductions to each section, and an introduction to the entire collection that outlines the connections throughout and survey the current state of macroeconomic theory. Specific issues covered are predetermined exchange rates, currency substitution, domestic public debt and seigniorage, and stabilizing transition economics.