Dollarization in Lithuania

Abstract

This study assesses the causes of dollarization in Lithuania. Dollarization is defined here as the use of foreign currency both as a medium of exchange and store of value. The study observes that, as the theory suggests, the degree of dollarization (measured as the ratio of foreign currency deposits to M2) depends on the interest rate differential,.However, exchange rate movements do not offer any additional explanatory power to dollarization.In all likelihood, this depends on the currency board system currently in place in Lithuania.Devaluation expectations are probably embodied to a large extent in the interest rate differential.Degree of dollarization exhibits also some inertia.