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Financial dollarization: the role of banks and interest rates

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Author Info

  • Basso, Henrique S.
  • Calvo-Gonzalez, Oscar
  • Jurgilas, Marius

Abstract

This paper develops a model to explain the determinants of financial dollarization. Expanding on the existing literature, our framework allows interest rate differentials to play a role in explaining financial dollarization. It also accounts for the increasing presence of foreign banks in the local financial sector. Using a newly compiled data set on transition economies we find that increasing access to foreign funds leads to higher credit dollarization, while it decreases deposit dollarization. Interest rate differentials matter for the dollarization of both loans and deposits. Overall, the empirical results lend support to the predictions of our theoretical model. JEL Classification:

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0748.

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Date of creation: May 2007
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Handle: RePEc:ecb:ecbwps:20070748

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Related research

Keywords: Financial Dollarization; Foreign Banks; Interest Rate Differentials; Transition Economies;

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References

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  1. Barth, James R. & Caprio Jr., Gerard & Levine, Ross, 2001. "Bank regulation and supervision : what works best?," Policy Research Working Paper Series 2725, The World Bank.
  2. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers.
  3. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization," IMF Working Papers 00/146, International Monetary Fund.
  4. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
  5. Adolfo Barajas & Armando Méndez Morales, 2003. "Dollarization of Liabilities," IMF Working Papers 03/11, International Monetary Fund.
  6. Alain Ize, 2005. "Financial Dollarization Equilibria," IMF Working Papers 05/186, International Monetary Fund.
  7. Ralph de Haas & Ilko Naaborg, 2005. "Internal Capital Markets in Multinational Banks: Implications for European Transition Countries," DNB Working Papers 051, Netherlands Central Bank, Research Department.
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