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Determinants of Dollarization

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  • Marco Terrones
  • Luis Catão

Abstract

Dollarization in financial intermediation has exhibited a widely diverse pattern across countries. Empirical work relating it to macroeconomic variables has had only limited success in explaining the phenomenon. This paper presents a two-currency banking model to show that deposit and loan dollarization are determined by a broader set of factors. These include interest rates and exchange rate risk, as well as structural factors related to costly banking, credit market imperfections, and availability of tradable collateral. The direction in which dollarization tends to move with macroeconomic shocks is shown to depend on those factors as well as on initial dollarization levels.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 00/146.

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Length: 37
Date of creation: 01 Aug 2000
Date of revision:
Handle: RePEc:imf:imfwpa:00/146

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Keywords: Dollarization; Money; Banking; Emerging markets; banking system; bank lending; banking model; segmentation; bank credit; bank competition; bank loans; banks ? loan; banking firm; banking sector; bank deposits; financial crises; bankers; bank credit policies; foreign exchange; banking systems; exchange rate regimes; banking costs; bank assets; international reserve; capital flows; capital mobility; banking market; foreign exchange market; bank policy; bank restructuring;

References

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  1. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
  2. Luis Catão, 1997. "Bank Credit in Argentina in the Aftermath of the Mexican Crisis," IMF Working Papers 97/32, International Monetary Fund.
  3. Anne Krueger & Aaron Tornell, 1999. "The Role of Bank Restructuring in Recovering from Crises: Mexico 1995-98," NBER Working Papers 7042, National Bureau of Economic Research, Inc.
  4. Thomas, Lee R, 1985. "Portfolio Theory and Currency Substitution," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 17(3), pages 347-57, August.
  5. Sebastian Edwards & Carlos A. Végh, 1997. "Banks and Macroeconomic Disturbances Under Predetermined Exchange Rates," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 115, Universidad del CEMA.
  6. Calvo, Guillermo & Vegh, Carlos, 1992. "Currency Substitution in Developing Countries: An Introduction," MPRA Paper 20338, University Library of Munich, Germany.
  7. Ricardo Caballero & Arvind Krishnamurthy, 1998. "Emerging Market Crises: An Asset Markets Perspective," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 98-18, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Uribe, Martin, 1997. "Hysteresis in a simple model of currency substitution," Journal of Monetary Economics, Elsevier, Elsevier, vol. 40(1), pages 185-202, September.
  9. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  10. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1996. "Inflows of capital to developing countries in the 1990s," MPRA Paper 13707, University Library of Munich, Germany.
  11. Rogers, John H., 1992. "Convertibility risk and dollarization in Mexico: a vectorautoregressive analysis," Journal of International Money and Finance, Elsevier, Elsevier, vol. 11(2), pages 188-207, April.
  12. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  13. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
  14. Rajan, Raghuram G, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(2), pages 399-441, May.
  15. Sturzenegger, Federico, 1997. "Understanding the welfare implications of currency substitution," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 21(2-3), pages 391-416.
  16. Quirmbach, Herman C, 1988. "Comparative Statics for Oligopoly: Demand Shift Effects," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 451-59, August.
  17. Guillermo Calvo & Carlos A. Végh Gramont, 1992. "Currency Substitution in Developing Countries," IMF Working Papers 92/40, International Monetary Fund.
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