Hysteresis in Currency Substitution: The Middle East and North Africa

Abstract

After reviewing the theoretical and empirical literature on currency substitution, a model is used in this chapter to empirically examine the state of dollarization in Middle East and North African countries, using Lebanon and Egypt as case studies. For Lebanon, despite the decline in inflationary expectations, the expectations of currency depreciation, and an increase in real interest rate differentials between domestic and foreign currencies, dollarization did not decline by the anticipated amount. For Egypt, unlike many Latin American Countries, currency substitution was successfully reversed for a period when the government managed to peg the value of the Egyptian pound to the dollar.

Citation

Shahin, W.N. and Freiha, F.G. (2005), "Hysteresis in Currency Substitution: The Middle East and North Africa", Neaime, S. and Colton, N.A. (Ed.) Money and Finance in the Middle East: Missed Oportunities or Future Prospects? (Research in Middle East Economics, Vol. 6), Emerald Group Publishing Limited, Leeds, pp. 165-181. https://doi.org/10.1016/S1094-5334(05)06008-5