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This paper reviews evidence of dollarisation in Former Soviet Union (FSU) countries, and finds that it is still very high, the well-known hysteresis effect. However high dollarisation – defined as the use of any foreign currency – is not only due to inertial lack of confidence. There is also some tentative evidence that suggests foreign currency is used – in both cash and deposit form – as one of the very few alternative instruments for portfolio diversification in an embryonic financial market. It is also shown that, contrary to the received wisdom, high dollarisation does not seriously impede effective conduct of monetary policy: money demand in FSU countries is stabilising, and the most important objective, meaningful inflation control, has been widely achieved. Thus, high dollarisation is not per se as damaging as often thought, and in fact has a beneficial dimension in promoting financial market development. Nonetheless, high dollarisation remains a concern since it provides mechanisms for magnifying vulnerabilities in the event of a crisis even if it might not be the direct cause of a crisis. This necessarily implies that some policy options (such as immediate exchange rate devaluation) are not viable or very costly in a crisis. Comparative Economic Studies (2003) 45, 329–357. doi:10.1057/palgrave.ces.8100018

This paper considers the interaction between the private sector, the monetary authority, and the fiscal authority, and concludes that unrestricted central bank: independence may not be an optimal way to collect seigniorage revenues or stabilize supply shocks. Moreover, the paper shows that the implementation of an optimal inflation target results in optimal shares of government finances-seigniorage, taxes, and the spending shortfall-from society's point of view but still involves suboptimal stabilization. Even if price stability is the sole central bank: objective, a positive inflation target has important implications for the government's finances, as well as for stabilization.

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Billion" means a thousand million; "trillion" means a thousand billion.• "Basis points" refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to of 1 percentage point).As used in this publication, the term "country" does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.

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