The how, why and what questions of dollarization

This paper unfolds the puzzles of why dollarization helps reduce inflation in some countries but not in some others and why it might alleviate or aggravate exchange rate volatility. It also reveals how dollarization affects the monetary policy transmission mechanisms and why the exchange rate channel is most effective in a dollarized economy. This paper finds the balance sheet effect, the purchasing power effect, currency substitution effect, currency mismatch and “ fear of floating” as some of the answers to the why, how and what questions posed in the study

An Investigation of the Macroeconomic and Monetary Effects of Dollarization in Eritrea

Most countries of the developing world have voluntarily or involuntarily been involved in using foreign currencies and trapped their economies for either the best or worst outcomes of dollarization. For those countries that have fully dollarized their economies, dollarization has provided some benefits in terms of bringing economic stability. However, the benefits in these economies came with costs that have worsened the income inequality and poverty that exist within their economies. Similarly, some countries that rely partially on their own currencies and partially on foreign currencies have seen different outcomes of partial dollarization. This research has specifically examined the reliance of the Eritrean economy on hard currency. Despite numerous studies that have been conducted regarding the Eritrean economy, the dollarization of Eritrea is an important issue that has not been investigated. This research has uncovered what kind of dollarization the Eritrean economy has and also what factors drive the Eritrean dollarization. It has been found that there is partial dollarization with evidence of financial, sovereign liability and underground dollarization in the economy. Real dollarization is only manifested in the form of selling houses and lands in exchange for hard currency. It has also been discovered that banking practices, the structure of the interest rate, loans issued to the private sector relative to the government sector and the Eritrean monetary system, particularly the introduction of new currency, followed by the second war with Ethiopia in 1998, are some of the causative factors. Furthermore, this research has investigated the impact of partial dollarization of the Eritrean economy on macro-economic variables with specific examination on the exchange rate volatility, inflation and the monetary policy transmission mechanisms. In each analysis, quarterly data starting from 1996 to 2008 is employed. The fundamental reason for selecting this time period for the study is the inability to obtain the data for some of the variables outside the specified time period. Exponential Generalised Autoregressive Conditionally Heteroscedasticity in mean (EGARCH) model is applied over real official exchange rate and on both nominal as well as real black market exchange rates. Dollarization measured by a hard currency index is then augmented in the variance equation of EGARCH-M (1, 1). The results show that partial dollarization of the Eritrean economy enhances the volatility of the real official exchange rate, the nominal and the real black market exchange rates. To see whether partial dollarization reduces or produces inflation in the Eritrean economy, Vector Error Correction Models together with Dynamic Ordinary Least Squares (DOLS) are employed. The results indicate that inflation increases as a result of an increase in dollarization. This applies regardless of whether official or black market exchange rate data are used in the estimation. In terms of the short-run dynamics involved in the long-run relationship between dollarization and inflation, the speed of adjustment towards long-run equilibrium ranges from 7.2-7.6 percent per quarter. Both error correction terms are negative. This indicates that the adjustment process is stable and convergent towards the long-run equilibrium which implies that there is a guaranteed long-run relationship between inflation and the remaining variables including dollarization. To examine the effectiveness of the channels of the monetary policy, Vector Autoregressive (VAR), Structural Autoregressive (SVAR) and Toda and Yamamoto (TY) models have been used. The results suggest that there is an effective exchange rate channel through the black market, an ineffective credit channel through the credit issued to the private sector and an effective credit channel through the credit issued to the government. In general, the contribution of this study can be summarized in three different areas: first, the measurement of dollarization; second, the determinants of dollarization; third, the effects of dollarization. Some of the policy implications of the findings are first, the Bank of Eritrea should address its exchange rate policy by revisiting the current official exchange rate and, at the same time, by addressing the growth of the black market foreign exchange. The Bank of Eritrea should also address its regulation on banking practices and the structure of interest rates. Second, the bank should create a conducive environment for the private sector to promote economic growth and minimise excessive government expenditure which requires fiscal discipline. Third, there should be an effort made to pave the ways for economic and financial cooperation with neighbouring countries

Revealing the effects of ill global eco-financial systems and their capsules

This paper examines the origins of the global crisis, the impact of the crisis and the different capsules taken to address the crisis. Using daily data from mid-July 2002 to mid-July 2012 for five groups of economies, our estimation is based on BEKK diagonal GARCH. We augmented two dummy variables to represent the U.S. financial crisis and the debt crisis of Greece. We find that the U.S crisis has insignificant impact on the mean returns of all the economies except the African economies. The U.S. financial crisis, however, has positive and significant impact on the stock volatilities of all the groups except the African economies. The debt crisis of Greece, on the other hand, has negative and significant impact on the mean returns of the European and Latin American economies. Its impact on the stock volatilities, however, is positive and significant in all the economies except the African economies. In examining the origins of the crisis, we identify that excessive reliance of the U.S. economy on the credit system and on the stock market together with historic negligence of the production sector and inadequate regulation are some causative factors

Monetary policy and its transmission mechanisms in Eritrea

The main purpose of this study is to identify the best practices of monetary policy implementation in the Eritrean economy. As such, the paper examines what kind of monetary policy and transmission mechanisms are relevant to the Eritrean economy. It also addresses which channels are effective and which are not and why. Vector Autoregressive modelling is employed over the study period 1996Q1–2008Q4. This paper addresses the argument that the bank lending is the sole functioning channel in low income economies. We find that interest rate and official exchange rate channels are inoperative. However, effective exchange rate and credit channels exist through the black foreign exchange market and credit issued to the government sector. The main policy implication of this study is that the Bank of Eritrea might be able to control inflation through manipulating the reserve requirement ratio

The role of NGOs in corporate environmental responsibility practice: evidence from Ethiopia

This research explores the role of Non-Government Organizations (NGOs) in corporate environmental responsibility practice within the context of a developing country, Ethiopia, and provides a framework that enables NGOs to influence firms to improve environmental performance and increase environmental disclosure. This research is a qualitative research which employs content analysis. The result of the study shows that the environmental NGOs in Ethiopia are engaged more on reacting to the damage that has been caused by the unsustainable business practices rather than working proactively by collaborating with corporations, government and other stakeholders. This implies that donors should play a pivotal role in this regard since it is the donors’ thematic area of activities that dictates the NGOs projects and programs

Revealing the effects of ill global eco-financial systems and their capsules

This paper examines the origins of the global crisis, the impact of the crisis and the different capsules taken to address the crisis. Using daily data from mid-July 2002 to mid-July 2012 for five groups of economies, our estimation is based on BEKK diagonal GARCH. We augmented two dummy variables to represent the U.S. financial crisis and the debt crisis of Greece. We find that the U.S. crisis has insignificant impact on the mean returns of all the economies except the African economies. The U.S. financial crisis, however, has positive and significant impact on the stock volatilities of all the groups except the African economies. The debt crisis of Greece, on the other hand, has negative and significant impact on the mean returns of the European and Latin American economies. Its impact on the stock volatilities, however, is positive and significant in all the economies except the African economies. In examining the origins of the crisis, we identify that excessive reliance of the U.S. economy on the credit system and on the stock market together with historic negligence of the production sector and inadequate regulation are some causative factors