Bank Of Israel Research Articles

EFFICIENCY OF MONETARY POLICY IMPLEMENTATION AS A BASIS FOR CENTRAL BANK STABILISATION POLICY UNDER MARTIAL LAW (UKRAINIAN AND ISRAELI PRACTICES)

The purpose of the paper is to summarise and present the anti-crisis practices of a central bank during martial law in the country, based on the experience of the National Bank of Ukraine and the Bank of Israel. The research methodology is based on an analysis of reports, guidelines, statistical data, scientific articles, legislation bases, and other relevant materials. One of the methodological aspects of this study is a comparison of the knowledge acquired about the regulations implemented by the two central banks after the introduction of martial law in the countries. The objective is to identify potential lessons learned for the banking regulations of Ukraine and the State of Israel. The results of the study show that the practical implementation of stabilisation measures by central banks is crucial for achieving financial stability of the state both during and after wartime, as well as the ability to predict possible deepening of crises and minimise their consequences. The tools and methods used by these central banks differ. In particular, the NBU's main monetary policy instrument was foreign exchange interventions, while the BoI actively used the key policy rate. The proper formation of international currency reserves and the possibility of using them during a war-related crisis is critical for both countries. This fact confirms that crisis management has different types of scenarios. Each anti-crisis scenario is unique. This paper highlights the practical need for interaction between monetary and macroprudential policies of the central bank in wartime. It demonstrates various combinations of methods and instruments of the central bank's monetary policy. This study also shows the interdependence of the economies of these two countries. Practical implementation. This analysis provides insight into the anti-crisis activities of central banks during unpredictable periods in a country's life, namely, during martial law. At the present stage, banking systems do not often face the challenges of war. Therefore, studying each case is important for improving theoretical knowledge and deepening practical research. Value / Originality. The author of the study collected the experience and practices of stabilisation activities of the central banks of Ukraine and Israel during the war.

The Perfect Storm: Bank of Israel's Forex Interventions, Global Banks' Limited Risk-Bearing Capacity, Deviations from Covered Interest Parity, and the Impact on the USD/ILS Options Market

The Perfect Storm: Bank of Israel's Forex Interventions, Global Banks' Limited Risk-Bearing Capacity, Deviations from Covered Interest Parity, and the Impact on the USD/ILS Options Market

THE IMPACT OF DIGITAL CURRENCY ON THE TRANSFORMATION OF MONETARY POLICY

The purpose of the paper is to study the specifics of the organization of issue and circulation of digital money by central banks, to summarize existing global expe-rience and assess the potential impact of digital currencies on the conditions of monetary policy, the functioning of the mechanism of money transmission and ensuring financial stability through the implementation of sound decisions of cen-tral banks in the digitalization of finance. Methodology. The study is based on an analysis of the scientific literature and points of view of foreign and domestic ex-perts in the field of digital technology. It is also based on the experience of the European Central Bank, the People's Bank of China, the Bank of England, the Bank of Israel and the National Bank of Ukraine on the implementation of pilot projects for the issue and use of digital currencies, quantitative and qualitative assessment of the impact of new forms of money on monetary policy, the func-tioning of the transmission mechanism, state finance, efficiency of payment sys-tems and payment transactions. In processing the material of the article used a set of general scientific and special methods of research, such as dialectical, his-torical-logical, system-functional and analytical approaches, generalization, scien-tific abstraction and others. The results of the study showed that the proposed digital currencies of central banks should be considered as a new high-tech dema-terialized form of national fiat money. Having summarized the impact of the issue and circulation of digital money by central banks on the main parameters of eco-nomic policy, it can be argued that their use will lead to significant changes in the structure and functions of commercial and central banks, as well as existing na-tional and transnational payment systems. The issuance and circulation of digital currency can significantly affect the nature of central banks' monetary policy, the conditions under which the monetary transmission mechanism functions, and the implementation of fiscal policy. Practical implications. The study revealed the main advantages and disadvantages of using centralized and decentralized models of issue and circulation of digital money by central banks, identified the direc-tions of institutional changes in the development of the banking system and the implementation of monetary policy in a digitalized economy, which will provide a high level of control over all monetary transactions of market players. Val-ue/originality. Using the experience of pilot projects on the issue and circulation of digital currencies of central banks will help to improve the effectiveness of monetary policy, to activate the mechanism of monetary transmission, to ensure the stable functioning of the financial system and reduce the level of shadow economy and corruption.

The Making of a Capital

This article analyzes the significance of Jerusalem in Jewish-Israeli consciousness through the city’s representations on banknotes, based on the proceedings of the Bank of Israel’s Banknotes and Coinage Planning Committee since its inception in 1955. The Banknotes Committee, as an institutional body that represents the ruling hegemony, has worked to bolster the emblematic status of Jerusalem as the Jewish-Israeli capital in the past as well as the present. When Israel ruled only the west part of the city from 1948 to 1967, banknotes carried images of that part of Jerusalem only. After the 1967 Six-Day War, however, the representations changed dramatically, mainly depicting sites situated in occupied East Jerusalem. Since 1967, the banknotes have presented the city as Israel’s ‘eternal capital’, never to be divided again.

Measuring the Effect of Forward Guidance in Small Open Economies: The Case of Israel

In this paper, I measure the effect of forward guidance in a small and open economy using Israel as a case study. I suggest an alternative approach to the standard method of Gurkaynak et al. (2005) that relaxes the assumption of constant structure and estimates the effect of forward guidance (FG) separately for each shock and term to maturity. Namely, I relax the assumption that the relative effect is fixed across maturities for every FG shock, regardless of the information contained in each FG statement. This approach also controls for global shocks under the assessment that their impact may not be negligible in a small open economy. I find that while the estimates of the shocks from both methods are highly correlated, in cases where the FG shocks mainly affect specific terms to maturity the standard method leads to imprecise identifications. The results suggest that policymakers should take into consideration which term to maturity each FG statement impacts. In addition, I show that some of the main FG statements made by the Bank of Israel had a significant effect on yields.

Land of milk and honey: Israeli landscapes and flora on banknotes

ABSTRACTIn times of geopolitical shifts, banknotes as symbolic objects are still playing a central role in the constitution and consolidation of nationhood. Using Israeli banknotes – which are means of banal nationalism and every-day nationalism – as a case study we wish to illuminate the role of the hegemonic institution of national banknotes in creating a selective tradition that organizes symbols related to flora as signifying a certain ‘territorial identity’. We used the qualitative methodology and analyzed relevant minutes of proceedings and correspondence of the Bank of Israel’s Banknotes and Coinage Planning Committee in Jerusalem, from 1955 to 2007.

How Do Homeowners Choose Between Fixed and Adjustable Rate Mortgages?

Housing is the most important asset in the portfolio of most households. Understanding the households’ decision on housing finance has important implications from a policy perspective, due to the effects it may have on the housing prices, on the housing market stability and on household welfare. The theoretical literature on housing finance focused on figuring out the optimal choice between fixed rate mortgages (FRMs) and adjustable rate mortgages (ARMs). We argue that the standard economic criteria are sometimes inadequate to explain household’s choices, which may be motivated by psychological factors. In other words, we claim that household’s choice depends only partially on the findings of the theoretical literature. We examine the effect of changes in the short-term market interest rate on the households’ choice between FRMs and ARMs. We test this effect using a unique data provided to us by the Bank of Israel, which contains detailed information on the household’s decision between FRM and ARM contracts in Israel in the past decade. The results of our analysis demonstrate a significant association between FRM preference and short-term interest rate reduction. Moreover, we find that the change in the short-term interest rate is more salient to the borrowers in periods of a high interest rate environment. We attribute these findings to Tversky and Kahneman (1974) availability and representativeness heuristics.

The New Economic Policy of 1962: How Israeli Economists Almost Changed the Israeli Economy

In February 1962, the Israeli government put in place a far-reaching economic liberalization reform. Had it been implemented as designed by the economists at the Bank of Israel and the Ministry of Finance, the plan could have dramatically changed Israel’s political-economic structure. Yet the plan’s actual implementation was limited and partial, with the result that economic liberalization was postponed for two further decades. This article examines the political dynamics through which Israeli economists tried to persuade political decision-makers to adopt the New Economic Policy and assesses the political obstructions that organized workers, employers, and the Ministry of Trade and Industry utilized in order to prevent its implementation. This analysis reveals the real yet limited political power that Israeli professional economists possessed in the 1960s, as well as the limits binding the power of the state with regard to organized economic interests.

Book Reviews

Robert M. Sauer of Royal Holloway, University of London reviews, “Immigration and Labor Market Mobility in Israel, 1990 to 2009” by Sarit Cohen Goldner, Zvi Eckstein and Yoram Weiss. The Econlit abstract of this book begins: “Explores the gradual process of occupational upgrading of immigrants and the associated rise in their wages, focusing on the experience of Soviet Jews who emigrated to Israel after the collapse of the Soviet Union in 1989. Discusses the aggregate macroeconomic impact of a large inflow of immigrants; the wage growth of immigrants; immigrants' choice of employment, occupation, and human capital—dynamic stochastic empirical models; job search and loss of skills; the joint choice of residential location and employment by immigrants; and immigrants from the former Soviet Union after twenty years in Israel—evidence and interpretation. Cohen Goldner is Lecturer in the Department of Economics at Bar-Ilan University. Eckstein is Professor of Labor Economics at Tel-Aviv University and Deputy Governor of the Bank of Israel. Weiss is Professor of Economics at Tel-Aviv University.”

Between private property rights and national preferences: the Bank of Israel's early years

The history of the Bank of Israel is often told as a story that leads from servitude to independence. According to this conception, the bank was a weak and marginal institution during the developmental period of the state, and it turned into an independent actor in the neoliberal period. This article argues that the portrayal of the bank as marginal during the developing period fails to recognize the essential role it played in contributing to the capacity of the state to allocate credit more effectively. It maintains that that Bank of Israel provided the state with market compatible instruments in order to govern the banking system and depoliticized the allocation of credit. The establishment of the bank had two effects on Israel's political economy: it enabled the government to weaken its dependence on the Histadrut as an agent of development and it allowed it to nurture linkages with the private sector.

How Homeowners Choose between Fixed and Adjustable Rate Mortgages?

Housing is the most important asset in the portfolio of most households. Understanding the households’ decision on housing finance has important implications from a policy perspective, due to the effects it may have on the housing prices, on the housing market stability and on household welfare. The theoretical literature on housing finance focused on figuring out the optimal choice between Fixed Rate Mortgages (FRM) and Adjustable Rate Mortgages (ARM). We argue that the standard economic criteria are sometimes inadequate to explain household’s choices, which may be motivated by psychological factors. In other words, we claim that household’s choice depends only partially on the findings of the theoretical literature. We examine the effect of changes in the short term market interest rate on the households’ choice between fixed rate mortgages (FRM) and adjustable rate mortgages (ARM). We test this effect using a unique data provided to us by the Bank of Israel, which contains detailed information on the household’s decision between fixed and adjustable rate mortgage contracts in Israel in the past decade. The results of our analysis demonstrate a significant association between FRM preference and short term interest rate reduction. Moreover, we find that the change in the short term interest rate is more salient to the borrowers in periods of a high interest rate environment. We attribute these findings to Tversky and Kahneman (1974) availability and representativeness heuristics.

International Practice of Inflation Targeting: Israel as a Case Study

The article deals with the transition to inflation targeting, which is a flexible and relatively new method of monetary policy. The Israeli experience in this field is analyzed. The paper shows that, after long periods of high inflation and disinflation the Bank of Israel has adopted the most efficient and painless for other macroeconomic objectives tools.

Ex-Post Evaluation of Monetary Policy

We employ a model-based approach in an ex-post evaluation of monetary policy decisions taken by the Bank of Israel during the years 2001-2010. Using ex-post information, we test, for each individual year, whether there could have been a Pareto improvement in inflation and output volatilities. This involves simulating counterfactual scenarios under alternative monetary policy shocks, where for each such simulation we compute the Root Mean Squares (RMS) of the inflation and output gaps during and following the evaluated year. We then examine the deviation of actual RMS from simulation-based frontiers. We also compare the actual RMS to a counterfactual RMS which would have been obtained for the case of no policy shocks. In other words, we test whether actual policy shocks were efficient. The exercise reveals several distinct sets of years: years in which actual RMSs were close to the efficient frontier (2001 and 2009) and years in which they were far away (2003, 2004 and 2006); years in which monetary policy shocks led to an absolute improvement in economic outcomes (2004 and 2008) or an absolute worsening (2003, 2006); and years characterized by aggressive policy shocks (2002, 2008 and 2009), which were usually aimed at narrowing the output gap at the expense of more volatile inflation.

Israel: Detailed Assessment of Observance of Basel Committee on Payments and Settlement Systems Core Principles for Systemically Important Payment Systems

This paper presents detailed assessment of Israel’s compliance with Basel Committee on Payments and Settlement Systems Core Principles for Systemically Important Payment Systems. A significant improvement in the payments landscape has been noted, with the high value payment system meeting most international standards. Together with the creation of the Zahav system, as part of the reform in the payment and settlement systems, the Bank of Israel has also introduced a series of other changes and improvements into the existing payments systems, to bring them into line with accepted international standards.

Israel: Monetary and Fiscal Policy

Israel’s monetary policy framework is broadly sound. Inflation targeting was introduced in the early 1990s, and low single-digit inflation was established by the end of the decade. However, fast transmission from the exchange rate to inflation means the operational challenges differ somewhat from those in many OECD countries. Also, the Bank of Israel has been intervening heavily in the foreign-exchange market, marking a departure from standard practice in inflation targeting. Past progress in fiscal consolidation has been affected by several economic shocks, including the recent downturn. The government’s strategy of lowering tax rates on corporate profits and on personal income is assessed. Also, various avenues for raising revenues on other fronts are suggested. Primary civilian spending is now relatively low in international comparison, the room for savings has narrowed, and many of the necessary future structural reforms probably require initial fiscal outlays. In budgeting, which is strongly controlled by the Ministry of Finance, there is room for various process improvements. This Working Paper relates to the 2009 OECD Economic Survey of Israel.

Inflation Expectations, Uncertainty and Monetary Policy

Monetary economics as practiced by central bank modelers has made a great deal of progress in recent years. In a 2002 paper I interviewed research economists at four central banks and surveyed the models in use at those banks. I criticized the models for having lost all touch with statistical inference and with its connection to decision theory. I also criticized them for not following the rational expectations literature by jointly specifying and estimating the equations in their systems. And I pointed out that none of the models had a consistent treatment of asset markets. Since then many central banks, taking advantage of the new computational methods for Bayesian inference that economists are learning to use, have made substantial progress toward meeting the first two of these criticisms. They have still for the most part done little about the third. And academic economists are beginning to question some of the standard assumptions in the rational expectations framework that underlies these models. Recent events in financial markets, and the difficulties that they raise for central banks, make it painfully clear that even the frontier Bayesian DSGE models like that in use at the Swedish Riksbank do not model asset markets in any depth. But the problem goes beyond that: these models, and most academic macro models as well, assume a standard rational expectations framework: there is only one probability measure in play, the 'true' probability measure from which nature draws realizations. Agents in the model form expectations using this true distribution, conditioning on information sets that consist of all information in the model dated t and earlier. It is well documented that people do not actually behave this way, and in the literature on behavioral finance there is some suggestion that deviations from this standardized assumption of rational behavior given a common probability distribution may be important. The recent events in financial markets - the dotcom boom, the US house price boom, perhaps the continuing commodity price boom - look to some observers like bubbles that must have fed off some sort of irrational behavior. Many observers think that monetary policy might have somehow fueled these bubble-like episodes in asset markets. These are important questions for monetary policy, and it is disturbing that the monetary policy models in use cannot even be used to pose these questions. In this paper I focus on two particular, and related, deviations from the assumption that all agents have the same probability distribution and that they optimally process all information available up to some date t. I consider the implications of agents' being able to process information only at a limited rate, and the implications of agents' assuming differing probability distriubions. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on 'Whither monetary policy? Monetary policy challenges in the decade ahead' in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on 'Beyond price stability - the challenges ahead' and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Athanasios Orphanides and Lars E O Svensson.

Has the Monetary Transmission Process in the Euro Area Changed? Evidence Based on VAR Estimates

Empirical evidence on whether the euro area monetary transmission process has changed is, at best, mixed. We argue that this inconclusiveness is likely to be due to the fact that existing empirical studies concentrate on the effects of a particular development on a specific transmission channel. Another problem of this literature is that specific changes could have off-setting effects regarding the overall effectiveness of monetary policy, leaving open the question whether the ability of monetary policy to control inflation has been altered. In order to shed light on this issue, we investigate whether there has been a significant change in the overall transmission of monetary policy to inflation and output by estimating a standard VAR for the euro area and by searching for a possible break date. We find a significant break point around 1996 and some evidence for a second one around 1999. We compare impulse responses to a monetary policy shock for these episodes and find that the well-known 'stylised facts' of monetary policy transmission remain valid. Therefore, we argue that the general guiding principles of the Eurosystem monetary policy remain adequate. Moreover, it seems that monetary transmission after 1998 is not very different from before 1996, but probably very different in the interim period. This implies that evidence for the euro area could be biased by an 'atypical' interim period 1996-1999. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on 'Whither monetary policy? Monetary policy challenges in the decade ahead' in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on 'Beyond price stability - the challenges ahead' and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Marvin Goodfriend and Arminio Fraga Neto.

In Search of Monetary Stability: The Evolution of Monetary Policy

The mid-1980s began a period that might, in retrospect, be seen as the golden age of monetary policy. Worldwide inflation rates, which had come down from the high levels reached in the 1970s, were at the lowest level seen in a long time. In the real economy, low and stable inflation went along with growth - at first, reasonable, and later, remarkable - and with reduced volatility. The term Goldilocks is sometimes used to describe this solid, sustainable situation - meaning that, like the porridge in the fairy tale, it was neither too hot nor too cold but just right. A number of fortunate circumstances contributed to the Goldilocks economy. Deregulation and globalisation, with their impact on competition and pricing power in goods and labour markets, are sometimes seen as major factors supporting the achievement and maintenance of low inflation (Rogoff (2003)). With the weakening of deregulation and globalisation, will we see the end of the golden age, which then will turn out to have been only a short episode? On the one hand, an end to the golden age would be no surprise for those who have stressed from the outset that its highly positive macroeconomic outcomes were the result, if not of luck, then of benign circumstances whose combination could not be expected to last forever (Sims and Zha (2006)). And do not recent developments already confirm this sceptical assessment of the role of central banks and monetary policy during this period? Isn't inflation rising? Doesn't the ongoing turbulence in financial markets indicate that central banks did not - or, rather, could not - prevent such developments? On the other hand, have we not seen the emergence of a policy regime that should be robust enough to continue the period of monetary stability? And would not a regime of monetary stability contribute to the stability of the real economy? We might only ex post be able to give a definite answer to these questions. For the time being, we can just study the emergence of the current policy regime and its elements via the practice of central banking and the results of research. I would like to start with a personal note. It would be, to say the least, overambitious to survey in just a few pages roughly three decades of research on monetary policy. The same is true for the analysis of monetary policymaking during this period. What I have tried to do is simply provide the reflections of someone who, coming from academia, played a special role in two central banks - the Bundesbank (from 1990 to 1998) and the European Central Bank (from 1998 to 2006) - under extremely difficult circumstances, namely the aftermath of German reunification in 1990 and the launch of the European Union two years later. It was a challenge and a privilege to build the bridge between monetary policy research and monetary policymaking in those two central banks. What were the most relevant aspects of theory to be considered when deciding on monetary policy? How did it work in practice? I will start with some results of monetary policy and the advances in research that, to a large degree, were triggered by those results. The later sections analyse the principles guiding the conduct of monetary policy by the Bundesbank and the ECB and some specific aspects of monetary policy. One of the main lessons I got during my 16 years of central banking practice is that it is critical to raise questions and not ignore important insights - even if the dominant approaches in research seem to suggest otherwise. It should therefore not come as a surprise that the paper ends with open questions. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on Whither monetary policy? Monetary policy challenges in the decade ahead in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on Beyond price stability - the challenges ahead and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Allan H Meltzer.

Talking About Monetary Policy: The Virtues (and Vice?) of Central Bank Communication

Central banks, which used to be so secretive, are communicating more and more these days about their monetary policy. This development has proceeded hand in glove with a burgeoning new scholarly literature on the subject. The empirical evidence, reviewed selectively here, suggests that communication can move financial markets, enhance the predictability of monetary policy decisions, and perhaps even help central banks achieve their goals. A number of theoretical drawbacks to greater communication are also reviewed here. None seems very important in practice. That said, no consensus has yet emerged regarding what constitutes 'optimal' communication strategy - either in quantity or nature. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on 'Whither monetary policy? Monetary policy challenges in the decade ahead' in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on 'Beyond price stability - the challenges ahead' and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Benjamin M Friedman and YV Reddy.

Cambodia´ s Persistent Dollarization: Causes and Policy Options

For a long time it seemed that the extent of ... dollarization was impervious to improved economic performance. Now however we have several examples of countries that have dedollarized successfully ..., including Israel, Poland, Mexico, Egypt, and Turkey. And some signs of declining dollarization are evident in Latin American countries where it seemed that dollarization was impossible to reverse. Stanley Fischer (2006), Governor, Bank of Israel I. Introduction Cambodia has had a spectacular decade. economic and social achievements over the past ten years have been the most impressive in Cambodia's history. GDP growth has averaged close to 10 per cent over this period, resulting in an almost doubling of income per capita (Table 1). Poverty incidence is estimated to have fallen by about 1 per cent per annum (from 47 to 35 per cent, for the decade up to 2004), even though inequality has worsened (World Bank 2007). Consumer price inflation has fallen sharply from an average of 56 per cent over 1990-98 to an average 3.5 per cent over 1998-2007. Inflation has started rising again recently, with the spike in food and energy prices, but this is happening almost everywhere. (1) Government revenue collections have recently consistently exceeded expectations, and the budget deficit has fallen to manageable levels. recent discovery of oil and gas could be a significant boon for the country, and should provide the resources necessary to address a range of socio-economic issues, providing of course that the resources are not mismanaged. It is against this backdrop that we find that Cambodia today is still as dollarized, if not more so, than it was ten years ago. U.S. dollar still serves all the three functions of money: it is widely used as a medium of exchange, store of wealth and unit of account. (2) IMF estimates the share of dollars in currency in circulation to be about 90 per cent, little changed from what it was a decade ago. National Bank of Cambodia estimates the share of foreign currency deposits (FCDs) in broad money (M2) to have risen to its highest level ever of 75 per cent in 2006, and significantly higher than the 54 per cent recorded in 1998 (Table 1). Currently, about 97 per cent of banking deposits are in U.S. dollars. apparent lack of progress with dedollarization has led to frustration among a number of commentators, some of whom are pressing the government to play a more direct, interventionist role. There is growing concern that the process may be irreversible, unless forced. At the launching of the Cambodia Economic Forum on 17 January 2006, Finance Minister Keat Chhon concluded his opening remarks by stating that The combination of economic and political instability, which is disturbing the world now, requires Cambodia to be more proactive in enforcing de-dollarization policy .... An article in the June 2007 Phnom Penh Post titled Moves to Ban US Dollar'' (3) summarizes prevailing sentiments: Renewed calls to remove the U.S. dollar from widespread circulation in Cambodia are drawing bipartisan support, and some high-ranking government officials are calling the ban a pressing matter of national sovereignty and pride. move to finally 'de-dollarize' the Cambodian economy has been sidelined for years .... same article quotes Tioulong Saumura, a Sam Rainsy Party lawmaker: To de-dollarize is even more important now ... Decree it. Ban it! This is unthinkable in other places. This frustration is indeed understandable. But is enforced de-dollarization the right policy choice for Cambodia to pursue? In an article for that examined the pros and cons of dollarization in Cambodia, and policy options on the way forward, Menon (1998) concluded that dollarisation is not the problem, but is merely a symptom. problem (or the cause) is a lack of confidence in the riel, whilst the symptom (or the effect) is the use of another currency such as the US dollar. …