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What is Driving Financial De-Dollarization in Latin America?

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  • Mercedes Garcia-Escribano
  • Sebastian Sosa
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    Abstract

    In the last decade, a group of Latin American countries (Bolivia, Paraguay, Peru, and Uruguay) experienced a gradual, yet sustained decline in financial dollarization. This paper documents the stylized facts and uses a standard VAR approach to examine the drivers of both deposit and credit de-dollarization. It finds that the exchange rate appreciation has been a key factor explaining deposit de-dollarization. The introduction of prudential measures to create incentives to internalize the risks of dollarization (including an active management of reserve requirement differentials), the development of a capital market in local currency, and de-dollarization of deposits have all contributed to a decline in credit dollarization. Continuing efforts on these fronts, while maintaining macroeconomic stability and strong fundamentals, would help deepening de-dollarization.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/10.

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    Length: 23
    Date of creation: 01 Jan 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/10

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    Related research

    Keywords: Banking sector; Exchange rate appreciation; Foreign currency deposit accounts; Latin America; dollarization; exchange rate; exchange rate volatility; constant exchange rate; nominal exchange rate; foreign exchange; exchange rate movements; exchange rate shock; currency risks; exchange rates; exchange rate regime; exchange rate regimes; exchange rate risk; flexible exchange rate; capital flight; foreign exchange risk; current exchange rates; currency markets; exchange rate flexibility; exchange rate fluctuations; exchange rate policy; real exchange rate volatility; exchange risk; currency risk; flexible exchange rate regime; exchange rate changes; real exchange rate; financial crises;

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    1. Neanidis, Kyriakos C. & Savva, Christos S., 2009. "Financial dollarization: Short-run determinants in transition economies," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(10), pages 1860-1873, October.
    2. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Addicted to Dollars," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 594, China Economics and Management Academy, Central University of Finance and Economics.
    3. Alain Ize & Eduardo Levy Yeyati, 2005. "Financial De-Dollarization: Is It for Real?," Business School Working Papers, Universidad Torcuato Di Tella isitforreal, Universidad Torcuato Di Tella.
    4. Nicolo, Gianni De & Honohan, Patrick & Ize, Alain, 2005. "Dollarization of bank deposits: Causes and consequences," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(7), pages 1697-1727, July.
    5. S. Pelin Berkmen & Eduardo Cavallo, 2010. "Exchange Rate Policy and Liability Dollarization: What do the Data Reveal about Causality?," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 18(5), pages 781-795, November.
    6. Eduardo Levy Yeyati & Alain Ize, 2005. "Financial De-Dollarization," IMF Working Papers, International Monetary Fund 05/187, International Monetary Fund.
    7. Luca, Alina & Petrova, Iva, 2008. "What drives credit dollarization in transition economies?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(5), pages 858-869, May.
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    Cited by:
    1. Santiago Acosta-O. & David Coble, 2013. "The Interest rate and Exchange Rate Channels in Dollarized and non-dollarized Economies: The Eases of Chile, New Zealand, Peru and Uruguay," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, Central Bank of Chile, vol. 16(1), pages 04-23, April.

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