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	Oleh Havrylyshyn, International Monetary Fund
	Dollarization in the Former Soviet Union: From Hysteria to Hysteresis (joint paper with Christian H. Beddies, IMF) wiiw, 23 June 2003, 11 a.m.

The paper reviews evidence of dollarization in FSU countries, and finds it is still very high, the well known hysteresis effect. But high dollarization - defined as use of any foreign currency - is not only due to inertial lack of confidence. There is some tentative evidence that suggests foreign currency is used - in both cash and deposit form - as one of the very few alternative instruments for portfolio diversification in an embryonic financial market. It is also shown that, contrary to the received wisdom, high dollarization does not seriously impede effective conduct of monetary policy: money demand in FSU countries is stabilizing, and the most important objective, meaningful inflation control has been widely achieved. Thus, high dollarization is not per se as damaging as often thought, and in fact has a beneficial dimension in promoting financial market development. Nonetheless, high dollarization remains a concern since it provides mechanisms for magnifying vulnerabilities in the event of a crisis even if it might not be the direct cause of a crisis. This necessarily implies that some policy options (such as immediate exchange rate devaluation) are not viable or very costly in a crisis.


		top last update: February 2004