Pros and cons of official dollarization in Eastern Europe |
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Authors: | Antonin Rusek |
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Institution: | (1) Susquehanna University, U.S.A. |
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Abstract: | The balance of payments barrier is the biggest obstacle to growth in Eastern Europe. This problem stems from the existence
of individual national currencies which dynamically increases the risk associated with capital inflows. Capital inflow leads
to both domestic growth and domestic currency real appreciation, reducing net exports to a level insufficient to service international
debt obligations stemming from capital inflow. To avoid losses when capital flows are reversed, high domestic interest rates
are required to stem capital outflow. Result is the decline of domestic economic activity. Adoption of foreign currency eliminates
the need for net exports as the source of revenue needed to service debt obligation, hence it renders the balance of payments
as an obstacle to sustained capital flows and economic growth irrelevant. |
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Keywords: | |
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