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Dollarization of Liabilities: Beyond the Usual Suspects

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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: 26
    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;

    References

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    1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
    2. Michael P. Dooley, 1997. "A Model of Crises in Emerging Markets," NBER Working Papers 6300, National Bureau of Economic Research, Inc.
    3. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," Research Department Publications 4205, Inter-American Development Bank, Research Department.
    4. Demirguc-Kunt, Asli & Detragiache, Enrica, 2002. "Does deposit insurance increase banking system stability? An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1373-1406, October.
    5. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
    6. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1999. "Hedging and financial fragility in fixed exchange rate regimes," Working Paper Series WP-99-11, Federal Reserve Bank of Chicago.
    7. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
    8. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
    9. Miguel A. Savastano, 1996. "Dollarization in Latin America - Recent Evidence and Some Policy Issues," IMF Working Papers 96/4, International Monetary Fund.
    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 qt9jb1p0jg, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    11. 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.).
    12. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization - The Banking Side," IMF Working Papers 00/146, International Monetary Fund.
    13. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
    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: Causes and Policy Implications," IMF Working Papers 98/28, International Monetary Fund.
    16. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers.
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