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Dollarization rates in the Caucasus and Central Asia (CCA) region are among the highest in the world, with adverse consequences for macroeconomic stability, monetary policy transmission, and financial sector development. Using dynamic panel data models, we find that foreign exchange deposits and loans in the CCA are mainly driven by volatile inflation and exchange rates, low financial depth, and asymmetric exchange rate policies biased toward depreciation. Although there is no unique formula for success, empirical studies and cross-country experiences suggest that credible monetary and exchange rate frameworks, low and stable inflation, and deep domestic financial markets are essential ingredients of any de-dollarization strategy. In implementation, policymakers need to consider proper sequencing of policies, effective communication as well as risks from potential financial disintermediation and instability, and/or capital flight.

Financial institutions --- Dollarization --- Monetary policy --- Foreign exchange rates --- Financial intermediaries --- Lending institutions --- Associations, institutions, etc. --- Exchange rates --- Fixed exchange rates --- Flexible exchange rates --- Floating exchange rates --- Fluctuating exchange rates --- Foreign exchange --- Rates of exchange --- Monetary management --- Economic policy --- Currency boards --- Money supply --- Rates --- Foreign Exchange --- Money and Monetary Policy --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Financial Institutions and Services: General --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Development Planning and Policy: Trade Policy --- Factor Movement --- Foreign Exchange Policy --- Monetary economics --- Currency --- Currencies --- Exchange rate policy --- Money --- Russian Federation