Currency substitution in a de-dollarizing economy: The case of Russia

Barry Harrison () and Yulia Vymyatnina
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Barry Harrison : BOFIT, Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland

No 3/2007, BOFIT Discussion Papers from Bank of Finland, Institute for Economies in Transition

Abstract: Currency substitution, the use of foreign money to finance transactions between domestic residents, is a common feature of emerging market economies. Currency substitution re-duces the stability of money demand functions in ways that can seriously undermine cen-tral bank credibility and its efforts to implement monetary policy. Most transition econo-mies, including Russia, experienced widespread currency substitution in the early phase of transition. Following Russia’s financial meltdown in 1998, its monetary authorities intro-duced a raft of changes that substantially improved the stability and performance of the macroeconomy and reduced currency substitution. This paper investigates currency substi-tution in the Russian economy in the post-crisis period of 1999–2005. Several measures of currency substitution and different modelling frameworks consistently suggest an on-going decline in currency substitution, a shift that has important implications for Russian mone-tary policy.

Keywords: currency substitution; transition economies; de-dollarization (search for similar items in EconPapers)
JEL-codes: E58 F31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cis, nep-fdg, nep-ifn, nep-mac, nep-mon and nep-tra
Date: 2007-03-02
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