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Financial dollarization - the role of banks and interest rates

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Author Info
Henrique S. Basso () (School of Economics, Mathematics and Statistics, Birkbeck College, University of London, Malet Street, London, WC1E 7HX, United Kingdom.)
Oscar Calvo-Gonzalez () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Marius Jurgilas () (Department of Economics, College of Liberal Arts, University of Connecticut, 341 Mansfield Road, Unit1063, CT 06269-1063 USA.)

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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: E44, G21.

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Paper provided by European Central Bank in its series Working Paper Series with number 748.

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Length: 74 pages
Date of creation: May 2007
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Handle: RePEc:ecb:ecbwps:20070748

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

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April. [Downloadable!] (restricted)
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  2. 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. [Downloadable!]
  3. Alain Ize, 2005. "Financial Dollarization Equilibria: A Framework for Policy Analysis," IMF Working Papers 05/186, International Monetary Fund. [Downloadable!]
  4. Luis Catão & Marco Terrones, 2000. "Determinants of Dollarization - The Banking Side," IMF Working Papers 00/146, International Monetary Fund.
  5. Adolfo Barajas & Armando Méndez Morales, 2003. "Dollarization of Liabilities: Beyond the Usual Suspects," IMF Working Papers 03/11, International Monetary Fund. [Downloadable!]
  6. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March. [Downloadable!] (restricted)
  7. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Guido Wolswijk, 2007. "Short- and long-run tax elasticities - the case of the Netherlands," Working Paper Series 763, European Central Bank. [Downloadable!]
  2. Antje Berndt & Iulian Obreja, 2007. "The pricing of risk in European credit and corporate bond markets," Working Paper Series 805, European Central Bank. [Downloadable!]
  3. Helmut Stix, 2008. "Euroization: What Factors drive its Persistence? Household Data Evidence for Croatia, Slovenia and Slovakia," Working Papers 140, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
  4. Barbara Roffia & Andrea Zaghini, 2007. "Excess money growth and inflation dynamics," Working Paper Series 749, European Central Bank. [Downloadable!]
    Other versions:
  5. Jukka Jalava & Ilja Kristian Kavonius, 2007. "Durable goods and their effect on household saving rations in the euro area," Working Paper Series 755, European Central Bank. [Downloadable!]
  6. Philipp Engler & Michael Fidora & Christian Thimann, 2007. "External imbalances and the US current account - how supply-side changes affect an exchange rate adjustment," Working Paper Series 761, European Central Bank. [Downloadable!]
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