Munich Personal RePEc Archive

Currency substitution in an oil-rich CIS country: The case of Azerbaijan

Huseynov, Salman and Ahmadov, Vugar (2012): Currency substitution in an oil-rich CIS country: The case of Azerbaijan.

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Abstract

Since independence, currency substitution has drawn considerable attention in the policy circles of the CIS countries, but recently its nature has changed notably. High inflation volatility and fragile economic stability in the early phase of transition induced dollarization as people attempted to avoid rapid devaluation in their assets. However, in the previous decade, the dollarization process reversed its direction in CIS countries, especially in oil rich ones. The de-dollarization observed in Russia and Kazakhstan, and documented by various researchers, was also taking place in another oil rich CIS country, namely, in Azerbaijan. In this paper, we empirically study the existence of currency substitution between Azeri manat and US dollar in the first decade of 2000s, and expose the reverse trend in dollarization observed after the oil boom years. The estimation results reveal the recently new phenomenon of de-dollarization and increasing confidence in national currency, manat, in the post oil boom years.

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