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Deposit Dollarization and Its Impact on Financial Deepening in the Developing World

Author

Listed:
  • Eduardo Court

    (Pontificia Universidad Catolica Del Peru, Centrum Catolica)

  • Emre Ozsoz

    (Fashion Institute of Technology, State University of New York (SUNY), Social Sciences Department, and Fordham University, Center for International Policy Studies (CIPS))

  • Erick W. Rengifo

    (Fordham University, Department of Economics and Center for International Policy Studies (CIPS))

Abstract

One of the main reasons for dollarization is the erosion of money's function as a store of value as the Currency Substitution view suggests. It has not been uncommon for countries with high inflationary processes to have high dollarization ratios and banking system that faces important challenges and risks that significantly affect their ability to provide capital to the overall economy (financial intermediation). In these economies, dollarization played a dual role: in one hand, the role of a hedging instrument protecting the value of money and, in the other hand, contributing to generate the so-called currency mismatch and default risks. This paper investigates the role of dollarization on the development of financial intermediation in developing economies. Our empirical findings suggest that dollarization has a negative impact on financial deepening, except on high-inflation economies.

Suggested Citation

  • Eduardo Court & Emre Ozsoz & Erick W. Rengifo, 2010. "Deposit Dollarization and Its Impact on Financial Deepening in the Developing World," Fordham Economics Discussion Paper Series dp2010-08, Fordham University, Department of Economics.
  • Handle: RePEc:frd:wpaper:dp2010-08
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    References listed on IDEAS

    as
    1. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May.
    2. Eduardo Levy Yeyati, 2006. "Financial dollarization: evaluating the consequences [‘A simple model of monetary policy and currency crises’]," Economic Policy, CEPR;CES;MSH, vol. 21(45), pages 62-118.
    3. 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.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Kutan, Ali M. & Ozsoz, Emre & Rengifo, Erick W., 2012. "Cross-sectional determinants of bank performance under deposit dollarization in emerging markets," Emerging Markets Review, Elsevier, vol. 13(4), pages 478-492.

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    More about this item

    Keywords

    Dollarization; Financial Development; Financial Deepening;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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