An Analysis Of Currency Substitutin Effects On Exchange Rate And The Volatility Of Exchange Rate: An Evidence From Cambodia

Puthika Kou, Napon Hongsakulvasu


The substitution from domestic to foreign currency as a way of holding wealth and a mean of payment for goods and services still robust in many developing countries. In dollarized economy commonly dollars’ currency dominated national currency, particularly in banking’s deposit and loans. As in Cambodia, commercial banks allow accepting for foreign currency’s deposit from account holders. The increasing share of foreign currencies over the domestic currency causes the instability of the exchange rate. Therefore, this paper examines the issue of dollarization and the exchange rate volatility movement in Cambodia over the period pre, and post global crisis. It uses series monthly data from June 1998 to September 2017 while Cambodia’s economy is likely stable and dominated by dollarization. We estimate only not with GARCH (1,1) symmetric model but also with asymmetric GJR-GARCH (3,1) model with different residual distributions to capture the appropriated volatility model estimations. The finding suggests that the asymmetric GJR-GARCH (3,1) under GED is the best fit model compares to others and shows that dollarization does depreciate of Riel per US dollar and induces the exchange rate volatility. This paper also gives a situation of dollarization processes

Full Text:



Borensztein, A. B. and E. (2000). The Choice of Exchange Rate Regime and Monetary Target in highly Dollarize Economics.pdf. IMF wp/00/29.

Burnham, K. P., & Anderson, D. R. (2004). Multimodel inference: Understanding AIC and BIC in model selection. Sociological Methods and Research, 33(2), 261–304.

de Zamaróczy, M., & Sa, S. (2002). Macroeconomic Adjustment in a Highly Dollarized Economy The case of Cambodia. IMF Occasional Papers.

Engle, R. F., & Ng, V. K. (1993). Measuring and Testing the Impact of News on Volatility. Journal of Finance, 48(5), 1749–1777.

He, Z., & Maekawa, K. (2001). On spurious Granger causality. Economics Letters, 73(3), 307–313.

Honohan, P. (2007). Dollarization and exchange rate fluctuations. World Bank Economic Review, 4172, 1–24. Retrieved from

Kang, K. (2005). Is dollarization good for Cambodia? Global Economic Review, 34(2), 201–211.

Kem, R. V. (2001). Currency Substitution and Financial Sector Developments in Cambodia. International and Development Economics Working Papers, 1–31. Retrieved from

Kumamoto, H., & Kumamoto, M. (2014a). Currency Substitution and Monetary Policy under the Incomplete Financial Market. Japanese Journal of Monetary and Financial Economics, 2(2), 16–45.

Kumamoto, H., & Kumamoto, M. (2014b). Does Currency Substitution Affect Exchange Rate Volatility ?, 4(4), 698–704.

Lay, S. H., Kakinaka, M., & and Kotani, K. (2012). Exchange Rate Movements in a Dollarized Economy The Case of Cambodia. Asian Economic Bulletin, 29(1), 65–78.

Lim, C. M., & Sek, S. K. (2013). Comparing the Performances of GARCH-type Models in Capturing the Stock Market Volatility in Malaysia. Procedia Economics and Finance, 5(13), 478–487.

Mckinnon, B. R. I. (1982). Currency Substitution and Instability in the World Dollar Standard., 72(3), 320–333.

Menon, J., Carter, J., & Town, J. G. (2008). Cambodia’s persistent dollarization: Causes and policy options. ASEAN Economic Bulletin, 25(2), 228–237.

Ra, H. R. (2008). Modeling the Dollarization: A Case Study for Cambodia, Laos, and Vietnam. Global Economic Review, 37(2), 157–169.

Reinhart, C. M., Rogoff, K. S., & Savastano, M. A. (2003). Addicted to dollars. Annals of Economics and Finance, 15(1), 1–51.

Samreth, S. (2011). An empirical study on the hysteresis of currency substitution in Cambodia. Journal of Asian Economics, 22(6), 518–527.

Tsay. (2005). Analysis of Financial Time Series. Technometrics (Vol. 48).

Winkler, A., & et al. (2004). Official Dollarization/Euroization: Motives, Features and Policy Implication of Current Case. European Central Bank, 11(1607–1484), 1–63.

Yinusa, D. O. (2008). Between dollarization and exchange rate volatility: Nigeria’s portfolio diversification option. Journal of Policy Modeling, 30(5), 811–826.


  • There are currently no refbacks.