Dynamics of Currency Substitution, Asset Substitution and De facto Dollarisation and Euroisation in Transition Countries

Edgar Feige

Comparative Economic Studies, 2003, vol. 45, issue 3, 358-383

Abstract: This paper presents new evidence on the dynamics of dollarisation and euroisation for 25 transition countries. Estimates of the amount of foreign currency in circulation (FCC) in transition countries are used to develop a new comprehensive dollarisation index (CDI) and separate indices of currency substitution (CSI) and asset substitution. When the CDI is compared to the traditional dollarisation index that relies solely on foreign currency deposits as a proxy for the extent of dollarisation, I find that the comprehensive dollarisation measure provides a more complete picture of the extent of de facto dollarisation and euroisation, 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 dollarisation indicators enable researchers to examine the causes of the dollarisation 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. Comparative Economic Studies (2003) 45, 358–383. doi:10.1057/palgrave.ces.8100019

Date: 2003
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