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Dollars, Debt and the IFIs: Dedollarizing Multilateral Lending

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Author Info
Eduardo Levy Yeyati

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Abstract

Financial dollarization (FD) has been increasingly seen as a concern due to its negative impact on crisis propensity and output volatility, shifting the center of the FD debate towards a more proactive dedollarization stance. While often neglected, lending from International Financial Institutions (IFIs) is an important source of FD in emerging economies, and as such a dimension that cannot be overlooked by any dedollarization strategy. This paper revisits old and new arguments in favor of IFI lending in the local currency, and argues that any such initiative should rely, at least at an early stage, on the demand from residents in search for stable returns in units of the local consumption basket, but reluctant to take on sovereign risk. Due to their superior enforcement capacity, IFIs can intermediate these savings, currently invested in dollarized foreign assets, back into the local economy by offering investment grade local currency bonds and using the proceeds to dedollarize their own lending to non-investment grade countries, thereby contributing to reduce FD while fostering the development of local currency markets.

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File URL: http://www.utdt.edu/departamentos/empresarial/cif/pdfs-wp/wpcif-112004.pdf
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Paper provided by Universidad Torcuato Di Tella in its series Business School Working Papers with number dedollmultlending.

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Length: 48 pages
Date of creation: 2004
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Handle: RePEc:udt:wpbsdt:dedollmultlending

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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.:
  1. Eduardo Levy-Yeyati, 2004. "FINANCIAL DOLLARIZATION: Evaluating the consequences," Econometric Society 2004 Latin American Meetings 184, Econometric Society. [Downloadable!]
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  2. Barry Eichengreen & Ricardo Hausmann & Ugo Panizza, 2003. "Currency Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same and Why it Matters," NBER Working Papers 10036, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Claessens, Stijn & Klingebiel, Daniela & Schmukler, Sergio, 2003. "Government bonds in domestic and foreign currency: the role of macroeconomic and institutional factors," Policy Research Working Paper Series 2986, The World Bank. [Downloadable!]
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  4. Sergio L. Schmukler & Eduardo Levy-Yeyati & Maria Soledad Martinez Peria, 2004. "Market Discipline under Systemic Risk: Evidence from Bank Runs in Emerging Economies," Econometric Society 2004 Latin American Meetings 318, Econometric Society.
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  5. Christian Broda & Eduardo Levy Yeyati, 2003. "Endogenous deposit dollarization," Staff Reports 160, Federal Reserve Bank of New York. [Downloadable!]
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  6. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Domac, Ilker & Martinez-Peria, Maria Soledad, 2000. "Banking crises and exchange rate regimes - Is there a link?," Policy Research Working Paper Series 2489, The World Bank. [Downloadable!]
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  8. Juan Carlos Berganza & Alicia García-Herrero, 2004. "What makes balance sheet effects detrimental for the country risk premium?," Banco de España Working Papers 0423, Banco de España. [Downloadable!]
  9. Guillermo A. Calvo & Alejandro Izquierdo & Luis-Fernando Mejia, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," NBER Working Papers 10520, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Jeanne, Olivier & Zettelmeyer, Jeromin, 2001. "International Bailouts, Moral Hazard, and Conditionality," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  11. Gianni De Nicoló & Alain Ize & Patrick Honohan, 2003. "Dollarization of the Banking System: Good or Bad?," IMF Working Papers 03/146, International Monetary Fund. [Downloadable!]
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  12. Alicia Garcia Herrero & Juan Carlos Berganza, 2004. "What Makes Balance Sheet Effects Detrimental For The Country Risk Premium?," International Finance 0408002, EconWPA. [Downloadable!]
  13. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March. [Downloadable!] (restricted)
  14. Luis J. Álvarez & Ignacio Hernando, 2004. "Price setting behaviour in Spain: stylised facts using consumer price micro data," Banco de España Working Papers 0422, Banco de España. [Downloadable!]
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  15. Eduardo Borensztein & Paolo Mauro, 2002. "Reviving the Case for GDP-Indexed Bonds," IMF Policy Discussion Papers 02/10, International Monetary Fund.
  16. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2001. "Hedging and financial fragility in fixed exchange rate regimes," European Economic Review, Elsevier, vol. 45(7), pages 1151-1193. [Downloadable!] (restricted)
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  17. Thomas, Lee R, 1985. "Portfolio Theory and Currency Substitution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(3), pages 347-57, August. [Downloadable!] (restricted)
  18. Aghion, Philippe & Bolton, Patrick & Dewatripont, Mathias, 2000. "Contagious bank failures in a free banking system," European Economic Review, Elsevier, vol. 44(4-6), pages 713-718, May. [Downloadable!] (restricted)
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(explanations, 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.)

  1. Kevin Cowan & Eduardo Levy-Yeyati & Ugo Panizza & Federico Sturzenegger, 2006. "Sovereign Debt in the Americas: New Data and Stylized Facts," Working Papers Central Bank of Chile 371, Central Bank of Chile. [Downloadable!]
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  2. Barry Eichengreen, 2006. "Insurance Underwriter or Financial Development Fund: What Role for Reserve Pooling in Latin America?," NBER Working Papers 12451, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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