Modeling the Dollarization: A Case Study for Cambodia,Laos, and Vietnam

Abstract

We model the dollarization of three transitional economies in south-east Asia: Cambodia, Laos, and Vietnam which have been experiencing the transition and reform process of the economy for the time period 1992–2007. Based on Rojas-Suarez (IMF Working Paper WP/92/33, 1992) work, we examine whether the holdings of US dollars depend on the effect of the expected rate of depreciation in market exchange rates as expected by the model. Also, we examine whether the effects are proportional to the degree of the dollarization of the economy. The empirical results present that there are positive effects (expected) of the expected rate of depreciation in market exchange rates on the holdings of US dollars. The coefficients are statistically significant only for Cambodia and Laos, not for Vietnam. The effect is strongest for Cambodia, and this may reflect the fact that Cambodia's dollarization is stronger than those of Laos and Vietnam.