Dollarization in Lebanon

Abstract

Lebanon has experienced large-scale dollarization during and after its 15-year long civil war. This paper analyzes the driving forces behind the dollarization of the Lebanese economy, using two econometric models that, apart from determinants commonly included in empirical studies on the dollarization phenomenon, also specifically take into account the limited reversibility of the dollarization process. The latter is modeled through the inclusion of a ratchet variable, which implies an asymmetric substitution process between domestic and foreign currency. The ratchet effect, in the different definitions applied, is found to be significant. In addition, the expected depreciation, a stock adjustment variable and, when cross-border deposits of Lebanese residents are included in the analysis, also the interest rate differential are other statistically significant determinants of the dollarization process in Lebanon.