BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 1/2001:
Dollarization in Lithuania: An Econometric Approach
Igor Vetlov ()
Abstract: The paper analyses the factors driving dollarization in
Lithuania during the period from December 1992 to August 2000. Starting
with a brief overview of the major economic and political developments in
Lithuania, the study attempts to model the process of dollarization by
applying rigorous time series analysis. In particular, it investigates the
long- and short-run properties of the relationship between the
dollarization ratio and interest rates paid on domestic and foreign
currency deposits. The study identifies a relatively stable cointegrating
relationship between variables, whereby the dollarization ratio is
negatively related to the interest rate spread. In the constructed vector
error correction model, the deviations from the long-run relationship are
found be significant for the dynamics of all three variables. Overall, the
model explains the development of dollarization rather well. Simple
specification of the model is possible when interest rates reflect the
major economic and political events relevant to the process of
dollarization.
Keywords: dollarization; transition economy; currency board; unit roots; cointegration; vector error-correction; (follow links to similar papers)
JEL-Codes: C22; C51; C52; (follow links to similar papers)
61 pages, March 29, 2001
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