Network Externalities and Dollarization Hysteresis: The Case of Russia
IMF Working Papers, May 1, 2003
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- Network Externalities and Dollarization Hysteresis: The Case of Russia
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Bibliographic details
- Authors: Nienke Oomes
- Published: May 1, 2003
- Series: IMF Working Papers
Summary and central finding
- Dollarization in Russia increased rapidly during the early 1990s, but failed to come down in the second half of the 1990s in spite of exchange rate stabilization.
- The paper develops a model in which network externalities in the demand for currency can generate multiple stable steady states for the dollarization ratio, providing an explanation for the observed "dollarization hysteresis."
- The model is estimated using a new source of data on dollar currency holdings in Russia.
- The estimates confirm the existence of network externalities.
- On the basis of these estimates, the paper discusses several policies that could result in a permanent decrease in dollarization.
Model and mechanism
- Network externalities in the demand for currency can produce multiple stable steady states for the dollarization ratio.
- The multiple steady states mechanism explains how high-dollarization equilibria can persist even after exchange rate stabilization.
Data and estimation
- Estimation relies on a new source of data on dollar currency holdings in Russia.
- Empirical estimates confirm the presence of network externalities affecting currency demand and dollarization dynamics.
Policy discussion and implications
- The paper discusses several policies that could lead to a permanent decrease in dollarization (specific policy measures are evaluated on the basis of the model estimates and the confirmed network externalities).
- Policy design should account for network externalities and the possibility of multiple stable equilibria when aiming to reduce dollarization permanently.
Content in this bundle
- Network Externalities and Dollarization Hysteresis: The Case of Russia - ISCR/03/96