| Liberalization of exchanges controls in the 1990s, after several years of macroeconomic instability, was immediately followed by an upswing in the use of foreign currency in several the Sub-Saharan African economies. More recently, however, most of these economies have registered lower inflation and robust economic growth. Despite these developments, foreign currency continues to compete with domestic currencies as a store of value. Among the possible reasons for this persistence in dollarization is the level of institutional quality, which is reflective of the authorities' credibility in the pursuit of price stability and the preservation of the value of the local currency.;Despite the adverse effects of excessive financial dollarization on the effectiveness of monetary policy and on the stability of the financial system, little research has been focused on the experience of Sub-Saharan Africa. Therefore, this study investigates the economic and non-economic determinants of financial dollarization in 18 selected Sub-Saharan African economies.;This study also makes a methodological contribution to the field of study by suggesting a new index of dollarization: the Adjusted Dollarization Ratio. This measure reduces the distorting valuation effects inherent in measures used in previous studies. Using panel data analysis, the study finds that institutional quality does matter in the dollarization of deposits. In fact, the results show that while depositors are sensitive to the volatility in inflation, they show much more concern for the level of institutional quality. This indicates that the credibility of government policies in maintaining the store of value function of domestic currencies is important in determining the level of financial dollarization.;The relevance of this finding for future policy is that de-dollarization strategies should stretch beyond the attainment of low and stable inflation to include deliberate efforts to improve institutional quality and/or the credibility of public policy. In addition, for the promotion of regional convergence, this study supports the view that countries that seek to form a monetary union should not only target macroeconomic convergence criteria but should also aim at meeting institutional convergence criteria. |
