The Dollarisation Paradox in Cambodia: Network Externalities Matter

Veasna Kheng and Lei Pan

MPRA Paper from University Library of Munich, Germany

Abstract: The increase in dollarisation in Cambodia has been contrary to the general belief that macroeconomic and political stability help reduce dollarisation. We provide so far the first explanation for this counterfactual phenomenon. In doing so, this paper develops a theoretical model based on the framework ofUribe (1997) by including a dollar pricing index to amplify the network effects of using a foreign currency (denoted dollar). The dollar pricing index, a proportion of an economy denominated by the dollar, reduces the dollar’s transaction cost, thus increasing its usage in the economy. This increased use of the dollar further improves the experience of using it, hence results in higher usage of dollar in the price quotation. The positive interaction of using the dollar as a unit of account and a means of payment causes dollarisation continues to rise, even though the economy has achieved low inflation and political stability.

Keywords: Dollarisation; Dollar pricing index; Network externalities (search for similar items in EconPapers)
JEL-codes: E41 F41 (search for similar items in EconPapers)
Date: 2021-07-10
New Economics Papers: this item is included in nep-mac, nep-mon, nep-ore, nep-pay and nep-sea
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https://mpra.ub.uni-muenchen.de/110833/1/MPRA_paper_110833.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:108712

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