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Dollarization of the Banking System

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Author Info

  • Gianni De Nicoló
  • Patrick Honohan
  • Alain Ize

Abstract

This paper assesses the benefits and risks associated with dollarization of the banking system. We provide novel empirical evidence on the determinants of dollarization, its role in promoting financial development, and on whether dollarization is associated with financial instability. We find that: (a) the credibility of macroeconomic policy and the quality of institutions are both key determinants of cross-country variations in dollarization; (b) dollarization is likely to promote financial deepening only in a high inflation environment; and (c) financial instability is likely higher in dollarized economies. The implications of these findings for financial sector and monetary policies are discussed.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/146.

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Length: 43
Date of creation: 01 Jul 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/146

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Related research

Keywords: Dollarization; Banking systems; Financial sector; inflation; foreign currency; monetary policy; foreign exchange; inflation targeting; high inflation; inflation rate; monetary economics; exchange rate regimes; balance sheets; macroeconomic stability; effect of inflation; capital flows; financial crises; rate of inflation; price stability; average inflation rate; exchange rate depreciation; high inflation environment; average inflation; macroeconomic control; capital adequacy; real interest rates; currency boards; high inflation episodes; floating exchange rates; lower inflation; financial stability; inflation targeting regime; black market; low inflation; low levels of inflation;

References

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  1. John Y. Campbell & Luis M. Viceira & Joshua S. White, 2002. "Foreign Currency for Long-Term Investors," NBER Working Papers 9075, National Bureau of Economic Research, Inc.
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  3. Olivier Jeanne, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," IMF Working Papers 03/177, International Monetary Fund.
  4. Carlos O. Arteta, 2003. "Are financially dollarized countries more prone to costly crises?," International Finance Discussion Papers 763, Board of Governors of the Federal Reserve System (U.S.).
  5. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084 Central Bank of Chile.
  6. de la Torre, Augusto & Levy Yeyati, Eduardo & Schmukler, Sergio L, 2002. "Financial Globalization: Unequal Blessings," International Finance, Wiley Blackwell, vol. 5(3), pages 335-57, Winter.
  7. Honohan, Patrick & Shi, Anging, 2001. "Deposit dollarization and the financial sector in emerging economies," Policy Research Working Paper Series 2748, The World Bank.
  8. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2001. "A Corporate Balance-Sheet Approach to Currency Crises," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 01.14, Université de Lausanne, Faculté des HEC, DEEP.
  9. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
  10. John H. Cochrane, 1999. "New Facts in Finance," NBER Working Papers 7169, National Bureau of Economic Research, Inc.
  11. Levy-Yeyati, Eduardo & Sturzenegger, Federico & Reggio, Iliana, 2006. "On the Endogeneity of Exchange Rate Regimes," Working Paper Series rwp06-047, Harvard University, John F. Kennedy School of Government.
  12. Gianni De Nicolo, 2000. "Size, charter value and risk in banking: an international perspective," International Finance Discussion Papers 689, Board of Governors of the Federal Reserve System (U.S.).
  13. Dooley, Michael P, 2000. "A Model of Crises in Emerging Markets," Economic Journal, Royal Economic Society, vol. 110(460), pages 256-72, January.
  14. Gianni De Nicoló & M. G. Zephirin & Philip F. Bartholomew & Jahanara Zaman, 2003. "Bank Consolidation, Internationalization and Conglomeration," IMF Working Papers 03/158, International Monetary Fund.
  15. Dalia Hakura & Ehsan U. Choudhri, 2001. "Exchange Rate Pass-Through to Domestic Prices," IMF Working Papers 01/194, International Monetary Fund.
  16. Christian Broda & Eduardo Levy Yeyati, 2003. "Endogenous Deposit Dollarization," Business School Working Papers dieciseis, Universidad Torcuato Di Tella.
  17. Garber, Peter M, 1996. "Managing Risks to Financial Markets from Volatile Capital Flows: The Role of Prudential Regulation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 183-95, July.
  18. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Governance matters," Policy Research Working Paper Series 2196, The World Bank.
  19. Adolfo Barajas & Armando Méndez Morales, 2003. "Dollarization of Liabilities," IMF Working Papers 03/11, International Monetary Fund.
  20. Andrew Berg & Eduardo Borensztein, 2000. "The Choice of Exchange Rate Regime and Monetary Target in Highly Dollarized Economies," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 285-324, November.
  21. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
  22. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization," IMF Working Papers 00/146, International Monetary Fund.
  23. Martin Schneider & Aaron Tornell, 2004. "Balance Sheet Effects, Bailout Guarantees and Financial Crises," Review of Economic Studies, Wiley Blackwell, vol. 71, pages 883-913, 07.
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  25. John D. Burger & Francis E. Warnock, 2003. "Diversification, original sin, and international bond portfolios," International Finance Discussion Papers 755, Board of Governors of the Federal Reserve System (U.S.).
  26. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
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