Overshooting and Dollarization in the Democratic Republic of the Congo

Abstract

The paper develops an interpretation of volatile exchange rate movements in a dollarized economy with very high rates of inflation. Differences between the rate of inflation and currency depreciation (over- or undershooting of the exchange rate) are seen as a proxy for changes in the relative demand for domestic and foreign currency. A simple model is calibrated for the Democratic Republic of the Congo in the 1990s and is used to derive estimates of the rate of dollarization.Dollarization;Exchange rates;Economic models;inflation, foreign currency, money demand, monetary policy, central bank, high inflation, rate of inflation, money balances, foreign exchange, monetary fund, money supply, price level, inflation rate, inflation rates, money stock, annual inflation, quantity theory of money, rational expectations, monetary dynamics, real money, rates of inflation, high rates of inflation, quantity theory, monetary instrument, relative price, monetary shocks, domestic monetary policy, monetary policy instruments, theory of money, measure of inflation, real national income, lower inflation, change in inflation, relative prices, terms of trade shocks, changes in prices, terms of trade, global money, money market, monetary union, money growth, money circulation