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

Puthika Kou, Napon Hongsakulvasu

Abstract


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


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References


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