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Dollarization of assets and liabilities: Problem or solution?. The case of Bolivia

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  • Juan Antonio Morales Anaya

    (Banco Central de Bolivia)

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    Abstract

    Financial dollarization in Bolivia is near complete (over 90% of total deposits and loans). The paper gives an inventory of the problems caused by de facto dollarization to actual policy making. The phenomenon has deep roots and was engendered by high inflation that reached hyperinflationary proportions in the first half of the 1980s. Yet, controlling inflation has not been sufficient to reverse dollarization. Despite the declining trend of inflation since 1985, dollarization has increased. The policy of the Central Bank of Bolivia of increasing the rate of crawl of the exchange rate, in a crawling peg system, to deal with exogenous shocks, while inflation was relatively unstable even if low, may be an explanatory factor. However, the data seem to support the view that the lingering peso problem was more important. Indeed, the reduction in the pace of dollarization is still waiting for clearer signals that low inflation is to stay. Also, the liquidation policies of failing banks, policies that are currency-blind, and the lender-of-last-resort functions of the central bank, have further pushed dollarization. With dollarization, even partial, the nature of the central bank changes in fundamental ways and is reduced to a large extent to the role of liquidity insurer in dollars to the banking system, loosing more traditional functions. Also credit crunches and the implosion of the financial system are more likely in a (partially) dollarized economy. The gradual reduction of dollarization- through market-friendly mechanisms- would produce gains in total welfare by allowing a more independent monetary policy (and a more flexible exchange rate) to cope with exogenous shocks and to reduce the vulnerabilities of banks.

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    Bibliographic Info

    Article provided by Banco Central de Bolivia in its journal Revista de Análisis.

    Volume (Year): 6 (2003)
    Issue (Month): 1 (June)
    Pages: 7-39

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    Handle: RePEc:blv:journl:v:6:y:2003:i:1:p:7-39

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    Related research

    Keywords: dollarization; exchange rate regimes; real exchange rates; inflation;

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    References

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    1. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
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    Cited by:
    1. Machicado, Carlos Gustavo, 2008. "Liquidity shocks and the dollarization of a banking system," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 369-381, March.
    2. Ramon-Ballester, Francisco & Wezel, Torsten, 2007. "International financial linkages of Latin American banks: the effects of political risk and deposit dollarisation," Working Paper Series 0744, European Central Bank.
    3. Salvatore Dell'Erba & Martin Saldías Zambrana, 2006. "Financial Dollarization and Currency Substitution. An Empirical Study for Bolivia America than in Asia?," Kiel Advanced Studies Working Papers 432, Kiel Institute for the World Economy.

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