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Financial Dollarisation: Evaluating The Consequences

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Author Info
Eduardo Levy Yeyati

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Abstract

Financial dollarisation, defined as the holding by residents of foreign currency assets and liabilities, has been placed at the forefront of the policy debate in developing economies. The reasons include its alleged influence on the conduct of monetary policy and, most prominently, the deleterious impact of exchange rate depreciations on the solvency of dollar debtors (the balance sheet effect). However, the vast analytical literature on these issues contrasts with the scarcity of empirical work to support or refute these implications. This paper contributes to fill this gap. Using a new updated database, the paper revisits the evidence on the determinants of financial dollarisation, and tests whether the impact on monetary and financial stability, and economic performance predicted by the theory is verified in the data. It finds that financially dollarised economies display a more unstable demand for money, a greater propensity to suffer banking crises after a depreciation of the local currency, and slower and more volatile output growth, without significant gains in terms of domestic financial depth. In this light, the case for an active de-dollarisation policy is discussed.

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Paper provided by Universidad Torcuato Di Tella in its series Business School Working Papers with number findollarisation.

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Length: 61 pages
Date of creation: 2005
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Handle: RePEc:udt:wpbsdt:findollarisation

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  29. 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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  30. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2002. "IS-LM-BP in the Pampas," NBER Working Papers 9337, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  33. 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)
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