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Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Bank Currency Mismatches?

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  • Arteta, Carlos
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    Abstract

    The dollarization of bank deposits and credit is widespread in developing countries,resulting in varying degrees of currency mismatches in domestic financial intermediation, which in turn may accentuate balance sheet problems and thus financial fragility. It is widely argued that flexible exchange rate regimes encourage banks to match dollar-denominated liabilities with a corresponding amount of dollar-denominated assets, ameliorating currency mismatches. Does the behavior of dollar deposits and credit in financially dollarized economies support that presumption? A new database on deposit and credit dollarization in developing and transition countries is assembled and used to address this question. Empirical results suggest that, if anything, floating regimes seem to exacerbate, rather than ameliorate, currency mismatches in domestic financial intermediation, as those regimes seem to encourage deposit dollarization more strongly than they encourage matching via credit dollarization.

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    Bibliographic Info

    Paper provided by Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley in its series Center for International and Development Economics Research, Working Paper Series with number qt9jb1p0jg.

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    Date of creation: 01 May 2002
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    Handle: RePEc:cdl:ciders:qt9jb1p0jg

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    Keywords: Exchange rate regimes; dollarization; currency mismatches; economics;

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    Cited by:
    1. repec:idb:brikps:14578 is not listed on IDEAS
    2. Carlos O. Arteta, 2003. "Are financially dollarized countries more prone to costly crises?," International Finance Discussion Papers 763, Board of Governors of the Federal Reserve System (U.S.).
    3. Patrick Honohan, 2007. "Dollarization and Exchange Rate Fluctuations," The Institute for International Integration Studies Discussion Paper Series iiisdp201, IIIS.
    4. Pelin Berkmen & Eduardo A. Cavallo, 2007. "Exchange Rate Policy and Liability Dollarization," IMF Working Papers 07/33, International Monetary Fund.
    5. Cavallo, Eduardo A. & Frankel, Jeffrey A., 2008. "Does openness to trade make countries more vulnerable to sudden stops, or less? Using gravity to establish causality," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1430-1452, December.
    6. Eduardo A. Cavallo, 2005. "Trade, gravity, and sudden stops: on how commercial trade can increase the stability of capital flows," Working Paper 2005-23, Federal Reserve Bank of Atlanta.
    7. 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.
    8. Hoyt Bleakley & Kevin Cowan, 2002. "Corporate dollar debt and depreciations: much ado about nothing?," Working Papers 02-5, Federal Reserve Bank of Boston.
    9. Cowan, kevin & Quy-Toan Do, 2003. "Financial dollarization and central bank credibility," Policy Research Working Paper Series 3082, The World Bank.
    10. Echeverry, Juan Carlos & Fergusson, Leopoldo & Steiner, Roberto & Aguilar, Camila, 2003. "'Dollar' debt in Colombian firms: are sinners punished during devaluations?," Emerging Markets Review, Elsevier, vol. 4(4), pages 417-449, December.
    11. Luca, Alina & Petrova, Iva, 2008. "What drives credit dollarization in transition economies?," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 858-869, May.
    12. Jose Luiz Rossi Junior, 2004. "Foreign Exchange exposure, corporate financial policies and the exchange rate regime: Evidence from Brazil," Econometric Society 2004 Latin American Meetings 163, Econometric Society.
    13. Lange, Carsten & Sauer, Christine, 2005. "Dollarization in Latin America: seigniorage costs and policy implications," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(4-5), pages 662-679, September.
    14. Adolfo Barajas & Armando Méndez Morales, 2003. "Dollarization of Liabilities," IMF Working Papers 03/11, International Monetary Fund.
    15. Nicolo, Gianni De & Honohan, Patrick & Ize, Alain, 2005. "Dollarization of bank deposits: Causes and consequences," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1697-1727, July.

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