Financial dollarization: the role of banks and interest rates
AbstractThis 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 InfoPaper provided by European Central Bank in its series Working Paper Series with number 0748.
Date of creation: May 2007
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-06-02 (All new papers)
- NEP-BAN-2007-06-02 (Banking)
- NEP-MAC-2007-06-02 (Macroeconomics)
- NEP-MON-2007-06-02 (Monetary Economics)
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