Network Externalities and Dollarization Hysteresis: The Case of Russia

Money Demand and Inflation in Dollarized Economies: The Case of Russia

“…With respect to the inflation equation, the unit labor cost estimates may need to be corrected for informal sector wages; Granger causality or weak exogeneity tests could be conducted to test for the direction of causality between wages and prices; and the robustness of the inflation results could be checked by using alternative measures of inflation (e.g., core or goods inflation) or other measures of utility costs (e.g., electricity tariffs). Possible ways to improve the money demand functions are to enhance the modeling of exchange rate expectations by, for example, including a ratchet variable to account for hysteresis (see Oomes, 2003;Kamin and Ericsson, 2003;and Mongardini and Mueller, 2000), and including measures of financial innovation and confidence in the banking system among money demand determinants.…”

“…An alternative time series on foreign cash holdings in Russia is based on net flows of U.S. dollars from the U.S. to Russia, as reported in the Currency and Monetary Instrument Reports (CMIRs) collected by the U.S. Customs Service. This CMIR estimate is described in detail in Oomes (2003), but is only available through November 1998, at which time U.S. dollar holdings were estimated at $63 billion. A different point estimate can be obtained from a survey conducted by Rimashevskaya (1998) and financed by the CBR, according to which foreign cash holdings in Russia amounted to $56 billion in October 1996.…”

“…Second, it is possible that a short-run valuation effect can become a longer-run volume effect. In fact, there is evidence of "dollarization hysteresis" in Russia (Oomes, 2003), implying that increases in foreign currency-denominated assets owing to depreciation are typically not reversed subsequently. For example, while the increase in the value of foreign assets following the August 1998 crisis was initially due to a valuation effect, the fact that this "unintended" rise was not quickly reversed suggests that it became in fact an "intended" increase, e.g., because of inflation, further expected depreciation, or network externalities.…”

Debt-Related Vulnerabilities and Financial Crises

“…5 Eichengreen, Hausmann, and Panizza (2003). 6 Reinhart, Rogoff, and Savastano (2003b); De Nicoló, Honohan, and Ize (2003); Caballero and Krishnamurthy (2000); Baliño, Bennett, and Borensztein (1999); Mongardini and Mueller (2000); Oomes (2003); Edwards (2001); Havrylyshyn and Beddies (2003).…”