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Mr. David A. Grigorian and Mr. Maxym Kryshko
The paper uses a unique survey of remittance-receiving individuals from Tajikistan to study the impact of policy awareness on consumer behavior. The results show that knowledge of deposit insurance encourages the use of formal channels for transmitting remittances and reduces dollarization. Given the size and importance of remittances in Tajikistan, improving financial literacy and better publicizing details of the social safety net may encourage a more frequent use of formal channels for transferring remittances and reduce reliance on foreign exchange for transaction purposes. This is likely to improve bank profitability, enhance financial stability, and improve access to finance.
International Monetary Fund

.D.R. and Vietnam ( Box 4 ). Figure 6. Foreign Currency Deposits in Cambodia, Lao P.D.R., and Vietnam (As percent of broad money) Source: IMF staff estimates. Measuring Cash Dollars Circulating Outside Banks in Cambodia Baliño, Bennett, and Borensztein ( 1999 ) contend that “in general terms, dollarization is a response to economic instability and high inflation and to the desire of domestic residents to diversify their asset portfolios.” While in the early 1990s, economic instability and high inflation certainly did prevail in Cambodia, these

International Monetary Fund

economic and political stability. There is a sizable amount of cash dollars circulating in the Cambodian economy, of which we provide an econometric estimate since early 1995. Residents keep a substantial amount of dollars in cash as a store of value, probably owing to the limited public confidence in the banking system and shallow financial intermediation. These dollars circulate very slowly in the economy, which remains relatively little monetized and operates predominantly on a cash basis, in particular as regards the national budget. The low estimated velocity

International Monetary Fund

during 1991–95 and this condition has continued to prevail since then. The country is largely a cash-based economy, with a large amount of cash dollars circulating outside the banking system. The originality of recent Cambodian economic policy is that it has been akin to an “orthodox” currency board arrangement, yet it has been implemented in a virtually fully dollarized environment. This policy has served Cambodia well since 1999, but a number of risks associated with the growing economy call for close monitoring of economic developments. This paper is organized as

International Monetary Fund
Cambodia became dollarized suddenly in the early 1990s, as a result of massive dollar inflows stemming from a postconflict situation. Considering that the amount of dollars in circulation is unusually high, we attempt to estimate the true degree of dollarization empirically. Our results show that Cambodia has been virtually fully dollarized since 1995. Against a background of severe institutional limitations, the authorities have implemented in recent years policies akin to those of a de facto currency board arrangement, in particular with respect to fiscal discipline. The paper concludes that this policy mix has been appropriate for Cambodia's circumstances.
International Monetary Fund

relatively minor role. Cambodia achieved almost complete de facto dollarization during 1991-95 and this condition has continued to prevail since then. Rapid dollarization resulted from the conjunction of an exogenous shock (supply of cash dollars) and a lack of confidence in the national currency. The country is largely a cash-based economy, with a large amount of cash dollars circulating outside the banking system. The originality of recent Cambodian economic policy is that it has been akin to an “orthodox” Currency Board Arrangement, yet it has been implemented in a

International Monetary Fund. Research Dept.

instabilities that caused it have been brought under control. Mongardini and Mueller (2000) find some econometric evidence of such a “ratchet effect” in foreign currency deposits in the Kyrgyz Republic, but not in cash dollars in circulation (for which they have some survey data). 2 The literature on partial dollarization makes a distinction between currency substitution—dollarization of money as a means of payment—and asset substitution, which refers to dollarization of stores of value. Earlier research, such as Agénor and Khan (1996), focused on currency substitution