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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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    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. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
    2. Eduardo Levy Yeyati & Alain Ize, 1998. "Dollarization of Financial Intermediation," IMF Working Papers 98/28, International Monetary Fund.
    3. Demirguc-Kunt, Asli & Detragiache, Enrica, 1999. "Does deposit insurance increase banking system stability ? An empirical investigation," Policy Research Working Paper Series 2247, The World Bank.
    4. Carlos Óscar Arteta, 2003. "Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Bank Currency Mismatches?," International Finance, EconWPA 0303005, EconWPA.
    5. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization," IMF Working Papers 00/146, International Monetary Fund.
    6. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
    7. 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.
    8. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 329-368.
    9. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1999. "Hedging and Financial Fragility in Fixed Exchange Rate Regimes," NBER Working Papers 7143, National Bureau of Economic Research, Inc.
    10. 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, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt9jb1p0jg, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    11. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, Elsevier, vol. 66(2), pages 387-414, December.
    12. Dooley, Michael P, 2000. "A Model of Crises in Emerging Markets," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(460), pages 256-72, January.
    13. Miguel A. Savastano, 1996. "Dollarization in Latin America," IMF Working Papers 96/4, International Monetary Fund.
    14. Olivier Jeanne, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," IMF Working Papers 03/177, International Monetary Fund.
    15. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
    16. Hélène Poirson, 2001. "How Do Countries Choose their Exchange Rate Regime?," IMF Working Papers 01/46, International Monetary Fund.
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