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Appendix I. Estimating the Degree of Dollarization in Liberia
Attachment 1. Estimating US Dollars in Circulation
Jules Leichter was co-desk economist for Liberia when this paper was prepared; Jeta Menkulasi was a summer intern at the IMF in 2007.
The authors would like to thank Robert Powell, Steve Radelet, Anne-Marie Gulde-Wolf, Romain Veyrune, Annamaria Kokenyne, Bozena Radzewicz-Bak and Scott Roger for useful comments.
This paper was presented in October 2008 in a seminar to officials of the Central Bank of Liberia and Ministry of Finance.
The situation in Liberia should be distinguished from the acceptance of a currency in payments on a voluntary basis, i.e. based on a contract between two parties. In Liberia, acceptance of either the Liberian or U.S. dollar for any transaction (both official and private) is prescribed by law.
See “An Act to Authorize the Establishment of the Central Bank of Liberia,” Part V, 19(1).
The Central Bank of Liberia was established on March 18, 1999, replacing the National Bank of Liberia.
According to de Zamaroczy and Sa (2003), seven of these countries use the currency of another country, and the other 20 belong to a currency union.
Brazil, Chile, Columbia, Venezuela, Israel, Poland, Armenia, Estonia, Lithuania, Nicaragua, Peru, Lao P.D.R., Bolivia, Honduras, Lebanon, Vietnam, Malaysia, Philippines, and Mexico.
Dollarization was considerably lower than in Liberia: Mexico started at 25 percent and Pakistan at 40 percent.
“An Act to Authorize the Establishment of the Central Bank of Liberia,” Part V, 19(1).
Baliño, Bennett, and Borensztein (1999), using U.S. Treasury data, report that in 1989–96, net dollar inflows into a number of small open economies represented three to four times the amount of local currency in circulation.
The series were detrended using an HP filter.
Some studies use data based on information from U.S. Customs, which requires reporting of private currency shipments of US$10,000 and above, and official currency shipments by the U.S. Federal Reserve Bank – however, this information is not readily available for Liberia.
The proposed approach is derived from the discussion of the role of foreign currency in the multiple deposit creation process in Iossifov, 1997.