Skip to main content
SpringerLink
Log in

Deposit dollarization in emerging markets: modelling the hysteresis effect

  • Published:
Journal of Economics and Finance Aims and scope Submit manuscript

Abstract

We estimate a nonlinear relationship that determines two equilibrium levels of deposit dollarization depending on the current value of dollarization and previous episodes of sharp depreciation of the national currency over the past five years. If exchange rate is stable, convergence to a higher equilibrium level of dollarization begins when the 45–50 % threshold of deposit dollarization is exceeded. We estimate the model for short-run dynamics of dollarization and find that the speed of convergence to the higher equilibrium implies quarterly increases of 1.2 to 3 percentage points in the ratio of foreign currency deposits to total deposits.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3

Similar content being viewed by others

Notes

  1. Admittedly, our results are thus mostly determined by dollarization developments in transition economies which constitute 10 out of 12 countries in our cross-section and therefore should be applied to other nations with caution. This situation is, however, far from unprecedented in the field of financial dollarization research. For example, seminal papers by Luca and Petrova (2008), Neanidis and Savva (2009) and Basso et al. (2011) are based on cross-sections that consist entirely of post-Soviet and East-European transition economies.

  2. Arguably, application of a default version of this seasonal adjustment approach may not be sufficient to account for all potentially noisy components of the series. On the other hand, the seasonal adjustment methodology recommends no to adjust for a suspected level shift or outlier unless there is an economic reason to explain its presence. This approach implies rigorous country-specific analysis which stays beyond the scope of this paper.

  3. A number of authors have carried out estimations of similar equations to study dollarization but without presenting any theoretical justification of the chosen functional form (see, for example, Clements and Schwartz (1993), Mueller (1994) and Mongardini and Mueller (2000)). Fernández Tellería (2006) presents both theoretical and empirical analysis.

  4. We have tested alternative hysteresis horizons (12 months, three years), the results were not significantly affected.

  5. Applying GLS cross-section weights does not change the results significantly.

  6. Two lags of et, irt, emaxt, dt were used as instruments.

  7. We clarify that observations in 2014–2015 were not used for the model’s estimation. For a detailed description of out-of-sample application of the model to Russia see Section 3 in Krupkina and Ponomarenko (2015).

  8. In accordance with the results obtained by Neanidis and Savva (2009), these indicators, as well as the interest rate differential, are robustly significant determinants of deposit dollarization. The interest rate indicator is statistically insignificant if included in the model. The model does not include indicators of institutional factors of dollarization, but their impact can presumably be captured by adding country fixed effects.

  9. Two lags of erf t , ir t , emax t , mbf t , d t - \( {d}_t^{*} \) were used as instruments.

  10. Under this set-up the intercept term in Eq. (5) effectively corresponds to the sum of β 0+ \( {\beta}_3{d}_{t-1}^{*} \)in Eq. (4)

  11. Interestingly, Neanidis and Savva (2009) also allowed for difference in parameterization of their models for countries with high and low dollarization. Their arbitrarily chosen 50 % dollarization threshold value turned out to be rather close to the optimal one. Their estimates indicate that in highly dollarized economies quarterly increases of deposit dollarization are higher by 1.5 to 4 p.p., which is roughly consistent with our results.

References

  • Baliño T, Bennett A, Borensztein E (1999) Monetary policy in dollarized economies. occasional paper, No. 171. International Monetary Fund, Washington DC

    Google Scholar 

  • Basso HS, Calvo-Gonzalez O, Jurgilas M (2011) Financial dollarization: the role of foreign owned banks and interest rates. J Bank Financ 35:794–806

    Article  Google Scholar 

  • Calvo G, Végh CA (1992) Currency Substitution in Developing Countries - An Introduction. Working Paper No. 92/40. International Monetary Fund, Washington DC

    Google Scholar 

  • Clements B, Schwartz G (1993) Currency substitution: the recent experience of Bolivia. World Dev 21(11):1183–1893

    Article  Google Scholar 

  • De Freitas ML (2003) Revisiting dollarization hysteresis: evidence from Bolivia, Turkey and Indonesia. Núcleo de Investigação em Políticas Económicas (NIPE), Escola de Economia e Gestão, Universidade do Minho, NIPE Working Papers, No. 12

  • Duffy J, Nikitin M, Smith RT (2006) Dollarization Traps. J Money Credit Bank 38(8):2074–2097

    Article  Google Scholar 

  • Everaert G, Pozzi L (2007) Bootstrap-based bias correction for dynamic panels. J Econ Dyn Control 31:1160–1184

    Article  Google Scholar 

  • Feige EL (2003) Dynamics of currency substitution, asset substitution and de facto dollarization and Euroization in transition countries. Comp Econ Stud 45:358–383

    Article  Google Scholar 

  • Fernández Tellería BX (2006) Dollarization hysteresis network externalities and the “past legacy” effect: the case of Bolivia. Banco Central de Bolivia, Revista de Análisis 7(1):7–64

    Google Scholar 

  • Guidotti PA, Rodriguez CE (1992) Dollarization in Latin America: Gresham’s law in reverse? Int Monet Fund S Pap 39:518–544

    Article  Google Scholar 

  • Hansen BE (1997) Inference in TAR models. Stud Nonlinear Dyn E 2:1–14

    Google Scholar 

  • Hansen BE (1999) Threshold effects in non-dynamic panels: estimation, testing, and inference. J Econometrics 93:345–368

    Article  Google Scholar 

  • Honohan P (2007) Dollarization and exchange rate fluctuations. CEPR Discussion Paper 6205

  • Ize A, Levy Yeyati E (2003) Financial Dollarization. J Int Econ 59:323–347

    Article  Google Scholar 

  • Kamin SB, Ericsson NR (2003) Dollarization in post-hyperinflationary Argentina. J Int Money Financ 22:85–211

    Article  Google Scholar 

  • Krupkina A, Ponomarenko A (2015) Deposit dollarization in emerging markets: modelling the hysteresis effect. Bank of Russia Working paper series No. 7

  • Luca A, Petrova I (2008) What drives credit dollarization in transition economies? J Bank Financ 32:858–869

    Article  Google Scholar 

  • Menon J (2008) Cambodia’s persistent dollarization: causes and policy options. Asian Development Bank, Working Papers on Regional Economic Integration No. 19

    Google Scholar 

  • Mongardini J, Mueller J (2000) Ratchet effects in currency substitution. An application to the Kyrgyz Republic. Int Monet Fund S Pap 47(2):218–237

    Google Scholar 

  • Mueller J (1994) Dollarization in Lebanon. International monetary fund working papers, No. 129 (WP/94/129). International Monetary Fund, Washington DC

    Google Scholar 

  • Neanidis K, Savva C (2009) Financial dollarization: short-run determinants in transition economies. J Bank Financ 33:1860–1873

    Article  Google Scholar 

  • Oomes N (2003). Network Externalities and Dollarization Hysteresis: The Case of Russia. International Monetary Fund Working Paper No. 03/96

  • Peiers B, Wrase JM (1997) Dollarization hysteresis and network externalities: theory and evidence from an informal Bolivian credit market. Federal reserve bank of Philadelphia, working papers, No. 97–21

  • Samreth S (2011) An empirical study on the hysteresis of currency substitution in Cambodia. J Asian Econ 22(6):518–527

    Article  Google Scholar 

  • Uribe M (1997) Hysteresis in a simple model of currency substitution. J Monet Econ 40:185–202

    Article  Google Scholar 

  • Valev NT (2010) The hysteresis of currency substitution: currency risk vs. network externalities. J Int Money Financ 29(2):224–235

    Article  Google Scholar 

Download references

Acknowledgments

The views expressed in this paper are solely those of the authors and do not necessarily reflect the official position of the Bank of Russia. The authors would like to express their gratitude to Sergei Seleznev and Andrey Sinyakov for valuable assistance.

Author information

Authors and Affiliations

  1. Bank of Russia, Neglinnaya 12, Moscow, Russia, 107016

    Anna Krupkina & Alexey Ponomarenko

  2. NRU-HSE, Myasnitskaya 20, Moscow, Russia, 101000

    Anna Krupkina

Authors
  1. Anna Krupkina
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Alexey Ponomarenko
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Alexey Ponomarenko.

Appendices

Appendix 1

Table 5 Summary statistics of variables
Full size table

Appendix 2

Observed deposit dollarization (vertical axis) and expected yield differential (horizontal axis) in emerging markets from 2003 to 2013 (annual average)

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Krupkina, A., Ponomarenko, A. Deposit dollarization in emerging markets: modelling the hysteresis effect. J Econ Finan 41, 794–805 (2017). https://doi.org/10.1007/s12197-016-9379-1

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s12197-016-9379-1

Keywords

JEL Classification

Search

Navigation