Dollarisation and overshooting in the Congo during the 1990s, an empirical estimate

Abstract

During the 1990s, whenever inflation accelerated in the Congo (Dem. Rep.) the domestic currency was abandoned in favour of dollar holdings. The increased demand for dollars resulted in a higher relative price of the latter or greater depreciation of domestic currency, which is the essence of exchange rate overshooting. In demand terms, there was a greater preference for foreign currencies than for goods. Unlike the Dornbusch model, the 1990s exchange rate overshooting associated with dollarisation in Congo assumes no price rigidity. It suggests, instead, that both prices and the exchange rate did adjust speedily to changes in the money supply.