BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 32/2015:
Deposit dollarization in emerging markets: modelling the hysteresis effect
Anna Krupkina ()
and Alexey Ponomarenko ()
Abstract: We apply empirical modelling set-ups developed to capture
the hysteresis effect in the data on deposit dollarization in a
cross-section of emerging market economies. Specifically, we estimate a
nonlinear relationship that determines two equilibrium levels of deposit
dollarization depending on the current value of dollarization and previous
episodes of sharp depreciation of the national currency over the past five
years. When exchange rates are stable, convergence to a higher equilibrium
level of dollarization begins when the 45–50% thresh-old of deposit
dollarization is exceeded. We estimate the model for short-run dynamics of
dollarization and find that the speed of convergence to the higher
equilibrium implies quarterly increases of 1.2–3 percentage points in the
ratio of foreign currency deposits to total deposits.
Keywords: dollarization; hysteresis; nonlinear model; emerging markets; (follow links to similar papers)
JEL-Codes: C23; E41; F31; (follow links to similar papers)
21 pages, November 10, 2015
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