Monetary Policy Under Financial Dollarization: The Case of Eurasian Economic Union
26 Pages Posted: 4 Jul 2017
Date Written: June 27, 2017
Despite the general improvement in controlling price levels over the last two decades, substantial amount of the population in developing world still save and borrow in foreign denominated currencies. There are reasons to believe that high degree of financial dollarization might impose difficulties in both the transmission capacity of monetary policy and the overall functioning of the financial sector. Correspondingly, the case of a typical emerging market economy, where external debts are denominated in foreign currency, whereas domestic firms heavily rely on receipts in national currency, potentially causes a higher vulnerability in the domestic banking sector due to currency mismatch issues and large fluctuations in the exchange rates, which is also one of the features of Inflation Targeting monetary policy. The aim of this paper is to investigate various features of high level of financial dollarization, its challenges for conducting Inflation Targeting monetary policy, and formulate a number of relevant policy recommendations and implications.
Keywords: Dollarization, Monetary policy, Eurasian Economic Union
JEL Classification: E52, F3, R5
Suggested Citation: Suggested Citation