## Dollarization in Transition Economies: Evidence and Policy Implications

_IMF Working Papers, September 1, 1995_

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## Bibliographic details
- Authors: Carlos A. Végh Gramont, Ratna Sahay
- Published: September 1, 1995
- Series: IMF Working Papers

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### Overview and research scope
- Authors: Carlos A. Végh Gramont, Ratna Sahay
- Publication date: September 1, 1995
- Series: Working Paper No. 1995/096
- Pages: 34
- Issue: 096
- Volume: 1995
- ISBN: 9781451950083
- ISSN: 1018-5941
- Stock No: WPIEA0961995

### Core findings on dollarization
- After most restrictions on foreign currency holdings were relaxed in the early 1990s, foreign currency deposits in transition economies increased rapidly.
- The paper examines evidence on dollarization for 15 transition economies.
- Depending on the institutional constraints, foreign currency deposits as a proportion of broad money reached a peak of between 30 and 60 percent in 1992-93.
- Unlike experiences documented in Latin America, dollarization fell substantially following successful stabilization plans in Estonia, Lithuania, Mongolia, and Poland.
- The decline in dollarization is attributed primarily to portfolio choice behavior: higher real returns on domestic-currency assets resulting from lower inflation and more market-determined interest rates.

### Conceptual implications
- Foreign currency deposits are largely a portfolio choice, not solely a transactional necessity.
- Institutional constraints shape the peak degree of dollarization observed across countries.
- Stabilization outcomes (lower inflation, market-determined interest rates) can reverse dollarization trends.

### Policy implications and recommendations
- Successful stabilization policies that lower inflation and promote market-determined interest rates can reduce dollarization.
- Strengthening domestic-currency asset returns is a key policy channel to encourage reallocation from foreign currency deposits to domestic currency.
- Institutional reforms that support monetary stabilization and market-based interest rate formation are central to reversing dollarization.

*Source: Dollarization in Transition Economies: Evidence and Policy Implications, IMF Working Papers 1995, 096 (1995).*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/dollarization-in-transition-economies-evidence-and-policy-implications-1905_