Dollarization and the “Unbundling” of Globalization in sub-Saharan Africa

Ajide, Kazeem and Raheem, Ibrahim and Asongu, Simplice (2018): Dollarization and the “Unbundling” of Globalization in sub-Saharan Africa. Forthcoming in: Research in International Business and Finance

Abstract

This study contributes to the dollarization literature by expanding its determinants to account for different dimensions of globalization, using the widely employed KOF index of globalization. Specifically, globalization is “unbundled” into three different layers namely: economic, social and political dimensions. The study focuses on 25 sub-Saharan African (SSA) countries for the period 2001-2012.Using the Tobit regression approach, the following findings are established. First, from both economic and statistical relevance, the social and political dimensions of globalization constitute the key dollarization amplifiers, while the explanatory power of the economic component is weaker on dollarization. Second, consistent with the theoretical underpinnings, macroeconomic instabilities (such as inflation and exchange rate volatilities) have the positive expected signs. Third, the positive association between the accumulation of international reserves and dollarization is also apparent. Policy implications are discussed.

• Item Type: MPRA Paper
• Language: English
• Keywords: Dollarization; Globalization; sub-Saharan Africa; Tobit regression
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C21 - Cross-Sectional Models ; Spatial Models ; Treatment Effect Models ; Quantile Regressions; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

Ajide, K, and Raheem, I.D (2016a). “Institutions-FDI Nexus in ECOWAS Countries”, Journal of African Business, 17(3), 319-341.

Ajide, K, and Raheem, I.D (2016b). “The Institutional Quality Impact on Remittances in the ECOWAS Sub-Region”, African Development Review, 28(4), 462-481.

Arellano, C. and Heathcote, J. (2010). “Dollarization and Financial Integration” Journal of Economic Theory, 145(3), 944-973.

Arteta, C. (2002). “Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Bank Currency Mismatches?” International Financial Discussion Paper, No.738, Board of Governors of the Federal Reserve System. Washington.

Arturo, B., and Schadler, S. (1980). “A Model of Currency Substitution in Exchange Rate Determination,” IMF Staff Paper 3: 513–42, International Monetary Fund, Washington.

Asel, I. (2010). “Financial Sector Development and Dollarization in the Economies of Central Asia”, Final Report for Grant No.PPC IX-69.Global Development Network Regional Research, Global Development Network, Washington.

Asongu, S. A., Efobi, U. R., and Tchamyou, V. S., (2018). “Globalisation and governance in Africa: a critical contribution to the empirics”, International Journal of Development Issues, 17(1), pp. 2-27.

Asongu, S. A., and Le Roux S. (2017). “Enhancing ICT for Inclusive Human Development in Sub-Saharan Africa”, Technological Forecasting and Social Change, 118(May), 44-54.

Asongu, S. A., and Nwachukwu, J. C. (2016a). “Revolution empirics: Predicting the Arab Spring”, Empirical Economics, 51(2), 439–482.

Asongu, S. A., and Nwachukwu, J. C. (2016b). “Mobile phones in the diffusion of knowledge for institutional quality in Sub-Saharan Africa”, World Development, 86(October), 133–147.

Asongu, S. A., Raheem, I. D., and Tchamyou, V. S. (2018).“Information Asymmetry and Financial Dollarization in Sub-Saharan Africa”, African Journal of Economic and Management Studies.9(2), 231-249.

Bahmani-Oskooee, M. and Techaratanachai, A. (2001) “Currency Substitution in Thailand”, Journal of Policy Modeling, 23(1), 141-145.

Balino, T., Bennett A., and Borensztein E. (1999).Monetary Policy in Dollarized Economies, IMF Occasional Paper, No. 171, Washington.

Basso, H. S., Calvo-Gonzalez, O. and Jurgilas, M. (2011). “Financial Dollarization: The Role of Foreign-Owned Banks and Interest Rates”, Journal of Banking and Finance, 35(4), 794–806.

Berkmen, P., and Cavallo, E. (2010). “Exchange rate policy and liability dollarization: what do the data reveal about causality?” Review of International Economics, 18(5), 781-795.

Boateng, A., Asongu, S. A., Akamavi, R., and Tchamyou, V. S., (2018). “Information asymmetry and market power in the African Banking Industry”, Journal of Multinational Financial Management, 44(March), 69-83.

Brown, M., De Haas, R. and Sokolov,V. (2015). “Regional Inflation, Financial Integration and Dollarization”. European Banking Center Discussion paper, 2015-2.

Calvo, G. A. and Guidotti, P., (1989). “Credibility and Nominal Debt: Exploring the Role of Maturity in Managing Inflation,” IMF Working Paper 89/73 (Washington: International Monetary Fund).

Corrales, J-S.Imam, P. A., Weber, S. and Yehoue, E. (2016). “Dollarisation in Sub-Saharan Africa”, Journal of African Economies, 25(1), 28-54.

De Nicolò, Gianni, Honohan, P. and Ize.A. (2003). “Dollarization of the Banking System: Good or Bad?” IMF Working Paper 03/146, International Monetary Fund, Washington.

Doblas-Madrid, A., (2009).“Fiscal Trends and Self-Fulfilling Crises”, Review of International Economics, 17,(1), 187–204.

Dreher, A. (2006). “Does Globalization Affect Growth? Evidence from a new Index of Globalization”, Applied Economics, 38(10), 1091-1110.

Edwards S., and Magendzo, I. I. (2003). “Dollarization and Economic Performance: What Do We Really Know?” International Journal of Finance and Economics, 8 (4), 351–63.

Girton, L., and Roper.D.(1981).“Theory and implications of currency substitution,” Journal of Money, Credit and Banking 13: 12–30.

Honig, A., (2009). “Dollarization, Exchange Rate Regimes, and Government Quality”, Journal of International Money and Finance, 28(2), 198–214.

Honohan, P., and Shi, A., (2002). “Deposit Dollarization and the Financial Sector in Emerging Economies”, World Bank Policy Research Working Paper, No. 2748, Washington.

Ize, A. and Parrado, E. (2002). “Dollarization, Monetary Policy, and the Pass through,” IMF Working Paper 02/188, Washington.

Ize, A. and Levy-Yeyati, E. (2003).“Financial Dollarization”, Journal of International Economics, 59(2003), 323–347.

Ize, A. and Levy-Yeyati, E. (2005).“Financial De-dollarization: Is it for Real?”IMFWorkingPaper 05/187, Washington.

Jeanne, O., (2003).“Why Emerging Markets Borrow in Foreign Currency”, IMF working paper number No. 03/177, Washington.

Kaplan, M., Kalyoncu, H. and Yucel, F. (2008).“Currency Substitution: Evidence from Turkey”. International Research Journal of Finance and Economics, No. 2,158–162.

Kaufmann, D, Kraay, A. and Zoido-Lobatón, P. (1999).“Aggregating Governance Indicators.”World Bank Policy Research Working Paper No. 2195, Washington, D.C.

Kessy, P.(2011). “Dollarization in Tanzania: empirical evidence and cross-country experience”,International Growth Centre Working Paper11/0251, International Monetary Fund, Washington.

Lane, P. R., and Milesi-Ferretti, G.M. (2006).“The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004”, IMF Working Paper Series Number WP/06/69.

Levy-Yeyati, E. (2006).“Financial dollarization: evaluating the consequences”. Economic Policy, 21(45), 61–118.

Levy-Yeyati, E., and Sturzenegger, F. (2005).“Classifying exchange rate regimes: deeds vs. words”.European Economic Review, 49(6),1603–1635.

Miles, M. (1978).“Currency substitution, flexible exchange rates, and monetary independence,” American Economic Review 3(2), 428–36.

Moreno-Villalaz, J.L.(2005).“Financial Integration and Dollarization: The case of Panama”. Cato Journal, 25(1),17-14.

Neanidis, K. C., and Savva, C. S. (2013). “Institutions and financial dollarization: Indirect effects based on a policy experiment”, Economics Letters, 121(3), 405–410.

Ortiz, G. (1983). “Dollarization in Mexico: Causes and consequences.” In Financial Policies and the World Capital Market: The Problem of Latin American Countries, edited by Pedro AspeArmella, RudigerDornbusch, and Maurice Obstfeld. Chicago: University of Chicago Press: 71–160.

Raheem, I. D. and Asongu, S. A. (2018). “Extending the Determinants of Dollarization in Sub-Saharan Africa: The Role of Easy Access to Foreign Exchange Earnings”, Research in International Business and Finance, 45(October), 106-120.

Rennhack, R. and Nozaki, M. (2006). “Financial Dollarization in Latin America,” in Financial Dollarization: The Policy Agenda, ed. by Armas, Ize, Levy (Washington: International Monetary Fund).

Sahay, R. and Vegh, C.A.(1996). “Dollarization in Transition Economies: Evidence and Policy Implications,” in The Macroeconomics of International Currencies: Theory, Policy, and Evidence, ed. by Mizen and Pentecost (UK: Cheltenham).

Savastano, M. (1996). “Dollarization in Latin America: Recent Evidence and Some Policy Issues,” IMF Working Paper No. 96/4 (Washington: International Monetary Fund).

Savastano, M.A., (1992). “The pattern of currency substitution in Latin America: An Overview”. Revista de AnalisisEconomico, 71(1),29–72.

Tobin, J. (1958). “Estimation of relationships for limited dependent variables”. Econometrica 26 (1), 24–36.

Vieira, F.A.C., Holland, M., and Resende, M. F., (2012).“Financial dollarization and systemic risks: new empirical evidence”. Journal of International Money and Finance, 31(6),1695–1714.

Yinusa, D.O. (2009). “Macroeconomic Fluctuations and Deposit Dollarization in Sub-Saharan Africa: Evidence from Panel Data”, MPRA Paper No. 16259, Munich.