Currency Substitution in a De-Dollarizing Economy: The Case of Russia

40 Pages Posted: 24 Jul 2007

See all articles by Barry Harrison

Barry Harrison

Nottingham Business School

Yulia Vymyatnina

European University at St. Petersburg (EUSP) - Department of Economics

Date Written: February 16, 2007

Abstract

Currency substitution, the use of foreign money to finance transactions between domestic residents, is a common feature of emerging market economies. Currency substitution reduces the stability of money demand functions in ways that can seriously undermine central bank credibility and its efforts to implement monetary policy. Most transition economies, including Russia, experienced widespread currency substitution in the early phase of transition. Following Russia's financial meltdown in 1998, its monetary authorities introduced a raft of changes that substantially improved the stability and performance of the macroeconomy and reduced currency substitution. This paper investigates currency substitution in the Russian economy in the post-crisis period of 1999-2005. Several measures of currency substitution and different modelling frameworks consistently suggest an on-going decline in currency substitution, a shift that has important implications for Russian monetary policy.

Keywords: currency substitution, transition economies, de-dollarization

JEL Classification: E58, F31, F41

Suggested Citation

Harrison, Barry and Vymyatnina, Yulia, Currency Substitution in a De-Dollarizing Economy: The Case of Russia (February 16, 2007). BOFIT Discussion Paper No. 3/2007, Available at SSRN: https://ssrn.com/abstract=1002282 or http://dx.doi.org/10.2139/ssrn.1002282

Barry Harrison (Contact Author)

Nottingham Business School ( email )

Burton Street
NG1 4BU Nottingham
United Kingdom

Yulia Vymyatnina

European University at St. Petersburg (EUSP) - Department of Economics ( email )

3 Gagarinskaya Street
St. Petersburg, 191187
Russia

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