An Empirical Behavioral Model of Households’ Deposit Dollarization

Abstract

We use the behavioral concept to endogenously model the evolution of the link between households’ deposit dollarization and exchange rate developments in Russia. We estimate the model empirically and show that the reaction of households to exchange rate appreciation weakens when exchange rate developments become more volatile. The proposed model outperforms the contemporary nonlinear time series models in forecasting the changes in dollarization during the Bank of Russia’s transition to a flexible exchange rate regime.

Keywords: Dollarization, behavioral finance, variational Bayes, Russia

JEL Classification: C11, D84, E44, G17