This paper analyses the importance of developing market-enhancing institutions for restoring economic growth in transition economies during 1991-98. The paper's main finding is that the development of an institutional framework has indeed a significant positive impact on growth, but that progress in achieving macroeconomic stabilisation and implementing broad-based economic reforms remain the key determinants of growth in transition economies. Comparative Economic Studies (2003) 45, 2-24.

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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

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This is a Working Paper and the author(s) would welcome any comments on the present text. Citations should refer to a Working Paper of the International Monetary Fund. The views expressed are those of the author(s) and do not necessarily represent those of the Fund.

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