Soft Currencies, Hard Landings
Edited by Gerald A. Epstein
Chapter 8: Monetary policy under financial dollarization: The case of the Eurasian Economic Union
Despite the general improvement in controlling price levels over the last two decades, a substantial number of the population in emerging market economies still save and borrow in foreign-denominated currencies. There are reasons to believe, however, that a high degree of financial dollarization presents obstacles in the transmission mechanisms of monetary policy and to the overall functioning of the financial sector. In the case of a typical developing economy – where external debts are denominated in foreign currency and domestic firms rely heavily on receipts in national currency – these difficulties are magnified. Financial dollarization in developing economies potentially leads to higher vulnerability of the domestic banking sector because of currency mismatch issues and large fluctuations in exchange rates, prompting the need for inflation-targeting monetary policy. This chapter investigates features of a high level of financial dollarization and the challenges it presents to inflation-targeting monetary policy in the Eurasian Economic Union. Based on a regression analysis, the chapter finds evidence that that the high level of financial dollarization in these countries tends to increase upward inflationary pressures at least in the short run, change the composition of total savings away from domestic currencies toward foreign ones, which potentially increases financial fragility in the banking sector. Thus, persistent high levels of financial dollarization imply that monetary policy is significantly limited through a greater exposure of banking sector to currency mismatches issues, which further increases demand for foreign assets.
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.