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Default Risk and Dollarization in Mexico

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  • Gruben, William C
  • Welch, John H

Abstract

Most empirical evidence of dollarization in Latin America accords with the theoretical claim that increases in expected devaluation increase dollarization. But John H. Rogers (1992) finds that, between 1978 and 1982, relative holdings of Mexdollars were negatively related to expected devaluation. Expected returns on Mexdollar deposits, however, depended on the solvency of the banking system. The authors investigate these links. They find that banking system insolvency decreases Mexdollar deposit demand and increases peso deposit demand. Once these effects are controlled for, Mexdollar demand increases with expected devaluation, even between 1978 and 1982. Copyright 1996 by Ohio State University Press.

Suggested Citation

  • Gruben, William C & Welch, John H, 1996. "Default Risk and Dollarization in Mexico," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 393-401, August.
    • Handle: RePEc:mcb:jmoncb:v:28:y:1996:i:3:p:393-401
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    1. repec:zbw:bofitp:2007_003 is not listed on IDEAS
    2. Welch, John H., 1996. "Capital flows and economic growth: Reflections on Latin America in the 1990s," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(Supplemen), pages 101-114.
    3. Valev, Neven T., 2010. "The hysteresis of currency substitution: Currency risk vs. network externalities," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 224-235, March.
    4. John H. Rogers, 1995. "Convertibility risk, default risk, and the Mexdollar anomaly," International Finance Discussion Papers 495, Board of Governors of the Federal Reserve System (U.S.).
    5. Perez-Batres, Luis A. & Eden, Lorraine, 2008. "Is there a liability of localness? How emerging market firms respond to regulatory punctuations," Journal of International Management, Elsevier, vol. 14(3), pages 232-251, September.
    6. Harrison, Barry & Vymyatnina, Yulia, 2007. "Currency substitution in a de-dollarizing economy: the case of Russia," BOFIT Discussion Papers 3/2007, Bank of Finland Institute for Emerging Economies (BOFIT).
    7. Kessy, Pantaleo, 2011. "Dollarization in Tanzania: empirical evidence and cross-country experience," LSE Research Online Documents on Economics 36381, London School of Economics and Political Science, LSE Library.
    8. Georgy Idrisov & Lev Freinkman, 2009. "Modeling the Currency Structure of Bank Deposits: Does the Ratchet Effect Matter?," Working Papers 0005, Gaidar Institute for Economic Policy, revised 2009.
    9. Haque, Mahfuzul & Varela, Oscar & Hassan, M. Kabir, 2007. "Safety-first and extreme value bilateral U.S.-Mexican portfolio optimization around the peso crisis and NAFTA in 1994," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(3), pages 449-469, July.
    10. Vedran Šošić & Evan Kraft, 2006. "Floating With A Large Life Jacket: Monetary And Exchange Rate Policies In Croatia Under Dollarization," Contemporary Economic Policy, Western Economic Association International, vol. 24(4), pages 492-506, October.
    11. Harrison, Barry & Vymyatnina, Yulia, 2007. "Currency substitution in a de-dollarizing economy : the case of Russia," BOFIT Discussion Papers 3/2007, Bank of Finland, Institute for Economies in Transition.
    12. Kamin, Steven B. & Ericsson, Neil R., 2003. "Dollarization in post-hyperinflationary Argentina," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 185-211, April.
    13. Fridman Alla & Verbetsky Aleksey, 2001. "Currency Substitution in Russia," EERC Working Paper Series 01-05e, EERC Research Network, Russia and CIS.

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