BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 3/2007:
Currency substitution in a de-dollarizing economy: The case of Russia
Barry Harrison ()
and Yulia Vymyatnina ()
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; (follow links to similar papers)
JEL-Codes: E58; F31; F41; (follow links to similar papers)
42 pages, March 2, 2007
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