Evaluating unofficial dollarization in the Iranian economy

Dollarization” is the use of foreign currency as a unit of account, store of value or a medium of exchange in addition to (or instead of) the domestic currency. In unofficial dollarization, people are not willing to keep domestic currency due to high inflation and depreciation of the national currency and will exchange a portion of their money into foreign currency. In this paper, using “Autoregressive Distributed Lag (ARDL)” model, dollarization index is estimated for the Iranian economy. Findings of this study show that the Iranian economy is dollarized. The dollarization index reached from 0.52 in 1978 to 0.77 in 1993 and persisted until 2003 due to dollarization irreversibility. The dollarization index declined after 2003 but increased in 2012 to 0.6. The main cause of dollarization in the Iranian economy ‌ is high and chronic inflation over the past forty years. For the inhibition of dollarization phenomenon, conditions should be created under which dollarization could become reversible through the enhancement of the confidence of domestic residents in national currency. For this purpose, negative shocks (currency and inflation) into the economy should be avoided for at least 10 years.; ;