Network Externalities and Dollarization Hysteresis: The Case of Russia

May 1, 2003

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Currencies, Depreciation, Dollarization, Exchange rates, Foreign exchange, Monetary base, Monetary policy, Money, National accounts

Keywords: Currencies, currency dollarization, currency substitution, Depreciation, depreciation rate, dollarization, dollarization hysteresis, dollarization ratio, Exchange rates, foreign currency, high-dollarization steady state, Monetary base, network externalities, ratchet effect, Russia, WP

Pages:
36
Volume:
2003
DOI:
---
Issue:
096
Series:
Working Paper No. 2003/096
Stock No:
WPIEA0962003
ISBN:
9781451851939
ISSN:
1018-5941

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