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Financial Dollarization Equilibria

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  • Alain Ize
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    Abstract

    Rapidly rising dollarization and numerous related financial crises in recent years have heightened the need for policy action. This paper contributes to the policy debate by presenting a common analytic framework that examines the roots of de facto financial dollarization under different economic environments and analyzes its interplay with monetary and prudential policies. In addition to providing a systematic analysis of the existence, stability, and multiplicity of dollarization equilibria, the paper makes a few novel contributions. In particular, it stresses the key role played by monetary policy endogeneity and identifies the underlying determinants of the peso premium that are responsible for inducing a preference for the dollar in financial transactions.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/186.

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    Length: 30
    Date of creation: 01 Sep 2005
    Date of revision:
    Handle: RePEc:imf:imfwpa:05/186

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    Related research

    Keywords: Dollarization; Credit risk; Risk premium; Economic models; exchange rate; currency risk; interest rate risk; overvaluation; moral hazard; overvaluations; flexible exchange rate; nominal exchange rate; financial stability; real exchange rate; exchange rate regime; nominal interest rate; currency crises; exchange rate overvaluations; financial system; exchange rate overvaluation; nominal depreciation; flexible exchange rate policy; equilibrium exchange rate; flexible exchange rate regime; exchange rate policy; financial institutions; exchange rate depreciations; currency mismatch; exchange rate shock; exchange rate peg; financial systems; nominal devaluations; exchange rate fluctuations; exchange rate shocks; fixed exchange rate regimes; hedging; financial contracts; exchange rate regimes; exchange rate adjustment; fixed exchange rate; deposit rate; financial market; financial fragility; exchange rate adjustments; deposit insurance;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
    2. Galindo, Arturo & Panizza, Ugo & Schiantarelli, Fabio, 2003. "Debt composition and balance sheet effects of currency depreciation: a summary of the micro evidence," Emerging Markets Review, Elsevier, vol. 4(4), pages 330-339, December.
    3. Nicolo, Gianni De & Honohan, Patrick & Ize, Alain, 2005. "Dollarization of bank deposits: Causes and consequences," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1697-1727, July.
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    Citations

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    Cited by:
    1. Juan Castro & Eduardo Morón, 2005. "Financial Dollarization and the Size of the Fear," Working Papers 05-03, Departamento de Economía, Universidad del Pacífico, revised Jul 2005.
    2. Basso, Henrique S. & Calvo-Gonzalez, Oscar & Jurgilas, Marius, 2011. "Financial dollarization: The role of foreign-owned banks and interest rates," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 794-806, April.
    3. Basso, Henrique S. & Calvo-Gonzalez, Oscar & Jurgilas, Marius, 2007. "Financial dollarization: the role of banks and interest rates," Working Paper Series 0748, European Central Bank.
    4. Eduardo Levy Yeyati & Alain Ize, 2005. "Financial De-Dollarization," IMF Working Papers 05/187, International Monetary Fund.
    5. Metin-Özcan, Kıvılcım & Us, Vuslat, 2007. "Dedollarization in Turkey after decades of dollarization: A myth or reality?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 385(1), pages 292-306.
    6. Robert Rennhack & Masahiro Nozaki, 2006. "Financial Dollarization in Latin America," IMF Working Papers 06/7, International Monetary Fund.

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