Alami, T.H., 2001, “Variance Decomposition Analysis of the Demand for Foreign Money in Egypt,” Journal of Economic Studies, Vol. 28, pp. 122–135.
Calvo, G.A., and C.A. Vegh, 1992, “Currency Substitution in Developing Countries: An Introduction,” IMF Working Paper 92/40 (Washington: International Monetary Fund).
Clements, B., and G. Schwartz, 1992, “Currency Substitution: The Recent Experience of Bolivia,” IMF Working Paper 92/65 (Washington: International Monetary Fund).
Cuddington, J., 1983, “Currency Substitution, Capital Mobility, and Money Demand”, Journal of International Money and Finance, Vol. 2, pp. 111–133.
Guidotti, P. and C.A. Rodriguez, 1992, “Dollarization in Latin America: Gresham’s Law in Reverse,” Staff Papers, International Monetary Fund, Vol. 39, No. 3, pp. 518–544.
Gruben, W.C. and J.H. Welch, 1996, “Default Risk and Dollarization in Mexico,” Journal of Money, Credit and Banking, Vol. 28, No. 3.
Ortiz, G., 1983, “Currency Substitution in Mexico: The Dollarization Problem,” Journal of Money, Credit and Banking, Vol. 15, pp. 174–85.
Rojas-Suarez, L., 1992. “Currency Substitution and Inflation in Peru,” Revista de Análisis Económico, Vol. 7, No. 1, pp. 153–176.
Rogers, J.H., 1992, “The Currency Substitution Hypothesis and Relative Demand in Mexico and Canada,” Journal of Money, Credit and Banking, Vol. 24, No. 3.
Sahay, R. and C. A., Vegh, 1996. “Dollarization in Transition Economies: Evidence and Policy Implications”, in: Mizen, P. and Pentacost, E. J. (Eds.), Macroeconomics of International Currencies, Theory, Policy and Evidence, Edward Elgar, Brookfield.
Savastano, M.A., 1990, “Speculative Attacks and Currency Substitution under Managed Exchange Rate Regimes in Developing Countries,” mimeo University of California, Los Angeles.
Savastano, M.A., 1996, “Dollarization in Latin America: Recent Evidence and Some Policy Issues,” IMF Working Paper 96/04 (Washington: International Monetary Fund).
Sturzenegger, F., 1997, “Understanding the Welfare Implications of Currency Substitution,” Journal of Economic Dynamics and Control, Vol. 21, pp. 391–416.
Yotopoulos, P.A. 1997, “Financial Crises and the Benefit of Mildly Repressed Exchange Rates,” Stanford University, Working Paper Series in Economics and Finance No. 202.
Prepared by E. Faal and N. Thacker.
Some transition economies, such as Estonia and Poland, have also experienced a decline in dollarization as their economies have stabilized.
Information on bank notes in circulation is not available, but is likely to be negligible as most transactions are in pesos.
In a rejoinder, Rogers tried to duplicate the Gruben and Welch analysis using their data set but was unable to reach similar conclusions.
M4 includes M2 plus domestic financial assets held by nonresidents plus deposits in branches and agencies of domestic banks abroad.
The current account deficit increased from 3.1 percent of GDP in 1978 to 5.8 percent of GDP in 1981 despite a sevenfold increase in oil receipts.
The previous change in regulations had been introduced in March 1977, when restrictions on holding FCDs were eased.
The country also experienced political turmoil and violence during this period.
Total resources include resources available in the domestic financial system (M4 plus bank’s external debt).
Estimates show that the net (including expected recovery of assets) fiscal costs of these various support programmes was about 20 per cent of GDP for 1995–97, half of which derived from the takeover of banks.
All variables are in logs, except interest rates.
This definition does not significantly alter the results compared with that using M4 alone.
As mentioned earlier, Rogers obtained a negative sign for this coefficient and interpreted this to imply the presence of convertibility risk.
This is consistent with the indicators used by the Fund to assess vulnerability of countries to economic crisis.
A useful discussion of unit root tests can be found in Perron (1989) and Phillips and Perron (1988).
One problem with the Johansen and Juselius procedure is that it is not able to exactly identify the parameters in the a and b matrices. Only if just one cointegrating vector is found can we make concrete conclusions about a unique long-run relationship between the variables.
We did not include a dummy variable for the 1996 changes in regulations in our analysis since we wanted to test for the reversal of the sharp dollarization episode of 1994–95. Including a dummy results in multiple cointegrating vectors.