Overshooting and Dollarization in the Democratic Republic of the Congo

IMF Working Papers, May 1, 2003

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Overshooting and Dollarization in the Democratic Republic of the Congo

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Bibliographic details

• Authors: Philippe Beaugrand
• Published: May 1, 2003
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451852844.001

Summary

• The paper develops an interpretation of volatile exchange rate movements in a dollarized economy with very high rates of inflation.
• Differences between the rate of inflation and currency depreciation (over- or undershooting of the exchange rate) are treated as a proxy for changes in the relative demand for domestic and foreign currency.
• A simple model is calibrated for the Democratic Republic of the Congo in the 1990s and is used to derive estimates of the rate of dollarization.

Model and empirical approach

• Uses a simple calibrated model tailored to the Democratic Republic of the Congo in the 1990s.
• Interprets exchange rate over- or undershooting relative to inflation as indicating shifts in money demand between domestic and foreign currency.
• Calibration is employed to translate observed inflation–depreciation differences into estimates of dollarization.

Key findings and estimates

• Volatile exchange rate movements in a highly dollarized, high-inflation environment can be explained by relative demand shifts for domestic versus foreign currency.
• The model is used to derive estimates of the rate of dollarization for the Democratic Republic of the Congo in the 1990s.
• (No numeric dollarization estimates are reported on this page; see the Working Paper for detailed quantitative results.)

Policy relevance and themes

• Addresses implications for monetary policy in dollarized economies experiencing very high inflation.
• Relevant subject areas: Currencies; Demand for money; Dollarization; Exchange rates; Foreign exchange; Inflation; Monetary policy; Money; Prices.
• Regional and topical focus includes: Central Africa; Congo; Sub-Saharan Africa; WAEMU currency zone; Zaïre.

Content in this bundle

• Overshooting and Dollarization in the Democratic Republic of the Congo - WP/03/105
  • Overshooting and Dollarization in the Democratic Republic of the Congo - WP/03/105 (Markdown version)
  • Overshooting and Dollarization in the Democratic Republic of the Congo - WP/03/105 (PDF)