Impact of Remittances on Natural Rate of Dollarization—Trends in Caucasus and Central Asia

Author/Editor:

Rocio Gondo ; Altynai Aidarova ; Manmohan Singh

Publication Date:

September 11, 2020

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

This paper discusses migration and remittances trends, and calculates the natural (or benchmark) level of dollarization in Caucasus, Central Asia and others in the region. This natural level of dollarization is conceptually linked to the currency allocation in a portfolio of deposits to maximize welfare, in line with Ize and Levy Yeyati (2003). The fall in remittances due to the economic slowdown since the spread of COVID-19 affects the macroeconomic fundamentals that determine demand for foreign currency deposits. We calculate the natural dollarization level by integrating structural macroeconomic characteristics. We show that despite the reduction in deposit dollarization, there is still a gap with respect to the natural level of dollarization, especially in a scenario of (persistent) lower remittance inflows.

Series:

Working Paper No. 20/185

Frequency:

regular

English

Publication Date:

September 11, 2020

ISBN/ISSN:

9781513556536/1018-5941

Stock No:

WPIEA2020185

Format:

Paper

Pages:

21

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