Dollarization of the economy in the Post-Soviet union countries - Курсовая работа

(Frankel, 2010) Countries which will be considered in the research are developing economies. Hence, they are exposed to high pass-through as well. In this sense governments would benefit if they know what the main determinants of dollarization process are, which factors favor its decrease and which do not. Today we still can find some countries and groups of countries with high dollarization degree of economy. Some of the states have managed to overcome dollarization (Angola, Peru, Turkey etc.) to a certain extent, while others could not (Belarus, Moldova, Serbia etc.). However, for the purpose of the research it is also necessary to pay attention at papers which were focused on groups of countries. Thus, Rennhack and Nozaki (2006) studied deposit dollarization factors in Latin American countries and determined that higher flexibility of exchange rate can foster de-dollarization. Garcia-Escribano (2010) presents evidence that number of dollarized deposits and credits in Latin America countries have been reduced by means of macroeconomic stability, flexibility of exchange rate, the implementation of prudential regulations that can better represent currency risks. Methods implemented in the paper include Ordinary Least Squares, normalization. Special attention is given to fixed and random effect models. The paper is organised as follows: the introduction provides the importance of the problem. Section 2 gives theoretical background about the phenomenon of dollarization, its pros and cons as well as literature review. Then, Section 3 introduces the research design which describes the framework of the study. Section 4 describes the methodology of the research. In Section 5 I present the discussion of results gained after the investigation. Section 6 encompasses comments on the research results and limitations. Finally the volume of the research makes up thirty six pages without appendix and literature sources. 1. Theoretical Background Definitely, the crucial concept in the research is dollarization. Accordingly, it is worth giving a notion. Authors have similar approaches to dollarization definition. Thus, they define dollarization as a situation when residents hold a significant portion of their assets in the form of foreign currency-denominated assets (Balino, 1999). Or, more generally - as a situation when residents officially or unofficially prefer to use foreign currency as a form of legal tender for carrying out transactions. In case of unofficial dollarization agents tend to use foreign currency for transactions. However, it might not be the legal tender. Official dollarization in turn considers foreign currency to become the tender within the country, but the national currency is also accepted. The primary reason for dollarization is to replace a less stable currency by a more stable one. Dollarization mainly involves the US dollar (however, other currencies can also be taken into account, e.g. euro). Authors provide empirical evidence on the factors of deposit dollarization, the role they play in fostering financial development, and on if dollarization is related to financial instability. They found that: a) Macroeconomic policy credibility and the institutional quality are both key drivers of cross-country variations in dollarization level; b) Dollarization can possibly promote financial deepening only in countries with high inflation levels; c) Financial instability is likely to be higher in economies with high dollarization degree. For Latin America countries Vetlov (2001) found that specific factors may lead to dollarization-high devaluation expectations, inflation rate, significant interest spread between domestic and foreign currency deposits, current account deficits, and inadequate levels of international reserves. Ize and Levy Yeyati (1998) provided analysis of exchange rate which showed that the share of dollars in the variance-minimizing portfolio depends on the stability of the real exchange rate and of the domestic price level and their correlation. Some authors have the same conclusions as Barajas and Morales (2003) on exchange rate volatility.