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Financial Dollarization, the portfolio approach and expectations: evidence for Latin America (1995-2005)

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  • Sanchez Alan

    ()
    (University of Oxford, Central Bank of Peru)

Abstract

The aim of this research is to evaluate to what extent the actual level and dynamics of financial dollarization prevalent in Latin America can be explained by the portfolio approach proposed by Ize and Levi Yeyati (2003). Inasmuch as the result of a portfolio optimization is sensible to the estimation of the variance-covariance matrix, this paper considers several alternatives to estimate the expected volatility by means of historical data so as to resemble two polar cases: short-memory and long-memory adaptive expectations. The main finding is that, for the period 1995-2005, financial dollarization in Latin America can be partially explained by the MVP ratio only if long-memory of past volatility events is assumed. Additional results are reported for highly dollarized countries.

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Bibliographic Info

Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2006-010.

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Date of creation: Oct 2006
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Handle: RePEc:rbp:wpaper:2006-010

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Keywords: Financial Dollarization; persistence; Latin America;

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  1. Arturo Galindo & Leonardo Leiderman, 2005. "Living with Dollarization and the Route to Dedollarization," Research Department Publications 4397, Inter-American Development Bank, Research Department.
  2. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  3. Marc Zelmer & Andrea Schaechter & Mark R. Stone & Alina Carare, 2002. "Establishing Initial Conditions in Support of Inflation Targeting," IMF Working Papers 02/102, International Monetary Fund.
  4. Winkelried, Diego & Castillo, Paul, 2010. "Dollarization persistence and individual heterogeneity," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1596-1618, December.
  5. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
  6. Uribe, Martin, 1997. "Hysteresis in a simple model of currency substitution," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 185-202, September.
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