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Exchange Rate Policy and Liability Dollarization: What do the Data Reveal about Causality?

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  • S. Pelin Berkmen
  • Eduardo Cavallo

Abstract

The paper identifies the contemporaneous relationship between exchange rate policy and liability dollarization using three different definitions of dollarization. The presence of endogeneity makes the empirical identification elusive. We use identification through heteroskedasticity to solve the endogeneity problem in the present context ( Rigobon, 2003 ). While we find that countries with high liability dollarization (external, public, or financial) tend to be more actively involved in exchange rate stabilization operations, we do not find evidence that floating, by itself, promotes de-dollarization. Copyright � 2010 Blackwell Publishing Ltd.

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File URL: http://www.blackwell-synergy.com/links/doi/10.1111/j.1467-9396.2010.00890.x
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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 18 (2010)
Issue (Month): 5 (November)
Pages: 781-795

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Handle: RePEc:bla:reviec:v:18:y:2010:i:5:p:781-795

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References

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  1. Ethan Kaplan & Dani Rodrik, 2002. "Did the Malaysian Capital Controls Work?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 393-440 National Bureau of Economic Research, Inc.
  2. Michael W. Klein, 2003. "Capital Account Openness and the Varieties of Growth Experience," NBER Working Papers 9500, National Bureau of Economic Research, Inc.
  3. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
  4. Jeffrey A. Frankel & Eduardo A. Cavallo, 2004. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, Or Less? Using Gravity to Establish Causality," NBER Working Papers 10957, National Bureau of Economic Research, Inc.
  5. Eduardo Levy-Yeyati & Federico Sturzenegger & Iliana Reggio, 2009. "On the endogeneity of exchange rate regimes," Economics Working Papers we098374, Universidad Carlos III, Departamento de Economía.
  6. Roberto Rigobon & Brian Sack, 2003. "Measuring The Reaction Of Monetary Policy To The Stock Market," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 639-669, May.
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  8. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers.
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  10. Roberto Rigobon & Brian Sack, 2003. "Spillovers across U.S. financial markets," Finance and Economics Discussion Series 2003-13, Board of Governors of the Federal Reserve System (U.S.).
  11. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
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  18. Eduardo Levy Yeyati & Alain Ize, 2005. "Financial De-Dollarization: Is It for Real?," IMF Working Papers 05/187, International Monetary Fund.
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Citations

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Cited by:
  1. Joyce, Joseph P. & Nabar, Malhar, 2009. "Sudden stops, banking crises and investment collapses in emerging markets," Journal of Development Economics, Elsevier, vol. 90(2), pages 314-322, November.
  2. Lula G. Mengesha & Mark J. Holmes, 2013. "Does Dollarization Alleviate Or Aggravate Exchange Rate Volatility?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 99-118, June.
  3. Carlos Eduardo León Rincón & Alejandro Reveiz, . "La dolarización financiera: Experiencia internacional y perspectivas para Colombia," Borradores de Economia 482, Banco de la Republica de Colombia.
  4. Mercedes Garcia-Escribano & Sebastian Sosa, 2011. "What is Driving Financial De-dollarization in Latin America?," IMF Working Papers 11/10, International Monetary Fund.
  5. Vieira, Fabrício A.C. & Holland, Márcio & Resende, Marco F., 2012. "Financial dollarization and systemic risks: New empirical evidence," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1695-1714.
  6. Chiţu, Livia, 2012. "Was unofficial dollarisation/euroisation an amplifier of the 'Great Recession' of 2007-09 in emerging economies," Working Paper Series 1473, European Central Bank.

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