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Dollarization of Liabilities

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  • Adolfo Barajas
  • Armando Méndez Morales
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    Abstract

    Dollarization of liabilities (DL) has emerged as a key factor in explaining the vulnerability of emerging markets to financial and currency crises. "Usual suspects" of causing DL comprise "fatalistic" determinants such as a long history of unsound macroeconomic policies and development and institutional factors, aided by moral hazard opportunities related to government guarantees. This paper assesses empirically the relevance of these factors relative to alternative explanations. Based on a sample of Latin American countries, we find that ongoing central bank intervention in the foreign exchange market, relative market power of borrowers, and financial penetration are at least as important in explaining DL.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/11.

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    Length: 41
    Date of creation: 01 Jan 2003
    Date of revision:
    Handle: RePEc:imf:imfwpa:03/11

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    Related research

    Keywords: Dollarization; Credit; Exchange rate regimes; Latin America; Banking; foreign currency; foreign exchange; deposit insurance; bank intervention; banking system; deposit insurance coverage; foreign banks; foreign exchange position; foreign asset; foreign assets; foreign exchange market; net foreign assets; banking crises; bank deposits; net foreign asset; foreign exchange intervention; foreign liabilities; deposit insurance scheme; bank policy; foreign asset holdings; bank operations; bank loans; banking system liabilities; bank profit; bank financing; bank lending; foreign currency deposit; banking supervision; banking activities; bank balance sheets; foreign investors; bank regulation; capital requirement; banking sector; bank bailouts; bank policies; market structure; bank losses; banks ? liabilities; bank borrowing; bankers; banking system development; banking system stability; bank intermediation; foreign bank; banking institutions; bank currency; prudential regulation; international lending; foreign currencies; international settlements; credit market;

    References

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    1. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    2. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2001. "Hedging and financial fragility in fixed exchange rate regimes," European Economic Review, Elsevier, vol. 45(7), pages 1151-1193.
    3. Michael P. Dooley, 1997. "A Model of Crises in Emerging Markets," NBER Working Papers 6300, National Bureau of Economic Research, Inc.
    4. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
    5. Asli Demirguc-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation," Econometric Society World Congress 2000 Contributed Papers 1751, Econometric Society.
    6. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    7. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
    8. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," IDB Publications 6467, Inter-American Development Bank.
    9. Carlos O. Arteta, 2002. "Exchange rate regimes and financial dollarization: does flexibility reduce bank currency mismatches?," International Finance Discussion Papers 738, Board of Governors of the Federal Reserve System (U.S.).
    10. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers.
    11. Miguel A. Savastano, 1996. "Dollarization in Latin America," IMF Working Papers 96/4, International Monetary Fund.
    12. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
    13. Arteta, Carlos, 2002. "Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Bank Currency Mismatches?," Center for International and Development Economics Research, Working Paper Series qt9jb1p0jg, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    14. Hélène Poirson, 2001. "How Do Countries Choose their Exchange Rate Regime?," IMF Working Papers 01/46, International Monetary Fund.
    15. Eduardo Levy Yeyati & Alain Ize, 1998. "Dollarization of Financial Intermediation," IMF Working Papers 98/28, International Monetary Fund.
    16. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization," IMF Working Papers 00/146, International Monetary Fund.
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