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Exchange rate regimes and financial dollarization: does flexibility reduce bank currency mismatches?

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Author Info
Carlos O. Arteta

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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 might accentuate bank balance sheet 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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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 738.

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Date of creation: 2002
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Keywords: Foreign exchange rates ; Dollar; American;

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  19. Ricardo J. Caballero & Arvind Krishnamurthy, 2000. "Dollarization of Liabilities: Underinsurance and Domestic Financial Underdevelopment," NBER Working Papers 7792, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Honohan, Patrick, 2007. "Dollarization and exchange rate fluctuations," Policy Research Working Paper Series 4172, The World Bank. [Downloadable!]
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  2. Pelin Berkmen & Eduardo E. Cavallo, 2007. "Exchange Rate Policy and Liability Dollarization: An Empirical Study," IMF Working Papers 07/33, International Monetary Fund. [Downloadable!]
  3. Hoyt Bleakley & Kevin Cowan, 2002. "Corporate dollar debt and depreciations: much ado about nothing?," Working Papers 02-5, Federal Reserve Bank of Boston. [Downloadable!]
    Other versions:
  4. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Juan Carlos Echeverry & Roberto Steiner & Leopoldo Ferguson, . "Hell, Heaven or Hedged: Debt Devaluation and Firm Investment in Colombia," DCBSLA Series 5, Inter-American Development Bank, Research Department. [Downloadable!]
  6. repec:bep:mactop:v:5:y:2005:i:1:p:1226-1226 is not listed on IDEAS
  7. Luis Carranza & Juan M. Cayo & José E. Galdón-Sánchez, 2003. "Exchange Rate Volatility and Economic Performance in Peru: A Firm Level Analysis," Faculty Working Papers 12/03, School of Economics and Business Administration, University of Navarra. [Downloadable!]
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  8. Frankel, Jeffrey & Cavallo, Eduardo, 2004. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality," Working Paper Series rwp04-038, Harvard University, John F. Kennedy School of Government. [Downloadable!]
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  9. 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. [Downloadable!]
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  10. 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.). [Downloadable!]
  11. Cowan, kevin & Quy-Toan Do, 2003. "Financial dollarization and central bank credibility," Policy Research Working Paper Series 3082, The World Bank. [Downloadable!]
  12. Hoyt Bleakley & Kevin Cowan, 2005. "Deuda empresarial denominada en dólares y depreciación: ¿mucho ruido y pocas nueces?," RES Working Papers 4412, Inter-American Development Bank, Research Department. [Downloadable!]
  13. 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. [Downloadable!]
  14. Adolfo Barajas & Armando Méndez Morales, 2003. "Dollarization of Liabilities: Beyond the Usual Suspects," IMF Working Papers 03/11, International Monetary Fund. [Downloadable!]
  15. Luis Carranza, . "Debt Composition and Balance Sheet Effects of Exchange and Interest Rates Volatility: Case of Peru," DCBSLA Series 6, Inter-American Development Bank, Research Department. [Downloadable!]
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