Network Externalities and Dollarization Hysteresis: The Case of Russia
36 Pages Posted: 29 Jan 2006
Date Written: May 2003
Dollarization in Russia increased rapidly during the early 1990s, but failed to come down in the second half of the 1990s in spite of exchange rate stabilization. To explain this dollarization hysteresis, this paper develops a model in which network externalities in the demand for currency can generate multiple stable steady states for the dollarization ratio. The model is estimated using a new source of data on dollar currency holdings in Russia. On the basis of these estimates, which confirm the existence of network externalities, the paper discusses several policies that could result in a permanent decrease in dollarization.
Keywords: dollarization, currency substitution, ratchet effect, network externalities, Russia
JEL Classification: E41, F31
Suggested Citation: Suggested Citation