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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. De la Torre, Augusto & Levy Yeyati, Eduardo & Schmukler, Sergio L., 2002. "Financial globalization : unequal blessings," Policy Research Working Paper Series 2903, The World Bank.
  2. Viceira, Luis & Campbell, John & White, Joshua, 2003. "Foreign Currency for Long-Term Investors," Scholarly Articles 3128708, Harvard University Department of Economics.
  3. Eduardo Levy Yeyati & Federico Sturzenegger & Iliana Reggio, 2002. "On the Endogeneity of Exchange Rate Regimes," Business School Working Papers veintiuno, Universidad Torcuato Di Tella.
  4. Dalia Hakura & Ehsan U. Choudhri, 2001. "Exchange Rate Pass-Through to Domestic Prices," IMF Working Papers 01/194, International Monetary Fund.
  5. 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.
  6. McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, vol. 87(2), pages 189-93, May.
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  8. 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.
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  10. Broda, Christian & Yeyati, Eduardo Levy, 2006. "Endogenous Deposit Dollarization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 963-988, June.
  11. RAFAEL LaPORTA & FLORENCIO LOPEZ-de-SILANES & ANDREI SHLEIFER & ROBERT W. VISHNY, . "Legal Determinants of External Finance,"," CRSP working papers 324, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  12. Levine, Ross & Loayza, Norman & Beck, Thorsten, 1999. "Financial intermediation and growth : Causality and causes," Policy Research Working Paper Series 2059, The World Bank.
  13. 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.
  14. 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.
  15. 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.).
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  17. John H. Cochrane, 1999. "New facts in finance," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 36-58.
  18. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
  19. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
  20. 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.).
  21. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Governance matters," Policy Research Working Paper Series 2196, The World Bank.
  22. Honohan, Patrick & Shi, Anging, 2001. "Deposit dollarization and the financial sector in emerging economies," Policy Research Working Paper Series 2748, The World Bank.
  23. 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.).
  24. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers.
  25. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization," IMF Working Papers 00/146, International Monetary Fund.
  26. 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.
  27. Michael Mussa, 2002. "Argentina and the Fund: From Triumph to Tragedy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa67.
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