Dollarization and Euroization in Transition Countries: Currency Substitution, Asset Substitution, Network Externalities and Irreversibility

Abstract

We examine the extent, causes and consequences of transition countries’ use of foreign currency as a co-circulating medium of exchange and store of value. Using new estimates of foreign cash in circulation, we obtain unique measures of currency substitution, asset substitution, and dollarization, and examine the consequences of network externalities for hysteresis and irreversibility. Finally, we examine factors leading some transition countries to euroize officially and bilaterally, and others to euroize unilaterally - that is, without prior sanction by the EMU.dollarization, euroization, transition economies, currency substitution, asset substitution, foreign currency, network externalities, irreversibility, underground economy