Currency substitution in Latin America - lessons from the 1990s
AbstractThe authors study how agents in Latin America allocate their balances between dollar-denominated and domestic currency-denominated accounts. They empirically determine the causes of currency substitution, its significance in recent banking crises, and the link between currency substitution, and volatility in macroeconomic aggregates. Their findings: The ratio of dollar deposits to broad money is strongly influenced by expectations of depreciation. They show that depositors in Latin America face some uncertainty and frictions when making their portfolio decisions. They explore the macroeconomic consequences of a dollarized economy. In particular, they find that, in the presence of currency substitution, past banking crises are good predictors of future crises. In other words, having a highly dollarized economy, increases the response of the banking system when there is a bad shock, which halts the outflow of capital. Once an economy is in crisis, however, having more dollar-denominated deposits in the banking system, increases the probability of a longer crisis in the future, because it increases exchange rate exposure in an already weak banking system. Finally, they show that the volatility of macroeconomic variables linked to the financial system, increases whenever the economy becomes more dollarized, which in turn makes the choice of monetary targets more difficult.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 2340.
Date of creation: 31 May 2000
Date of revision:
Macroeconomic Management; Fiscal&Monetary Policy; Economic Theory&Research; Banks&Banking Reform; Settlement of Investment Disputes;
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- William C. Gruben & Darryl McLeod, 2004. "Currency competition and inflation convergence," Center for Latin America Working Papers 0204, Federal Reserve Bank of Dallas.
- John Hawkins & Paul Masson, 2003. "Economic aspects of regional currency areas and the use of foreign currencies," BIS Papers chapters, in: Bank for International Settlements (ed.), Regional currency areas and the use of foreign currencies, volume 17, pages 4-42 Bank for International Settlements.
- Adenutsi, Deodat E., 2007. "The policy dilemma of economic openness and seigniorage-maximizing inflation in dollarised developing countries: The Ghanaian experience," MPRA Paper 37134, University Library of Munich, Germany.
- Lubo Komrek & Martin Meleck, 2004. "Money Demand in an Open Transition Economy," Eastern European Economics, M.E. Sharpe, Inc., vol. 42(5), pages 73-73, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).
If references are entirely missing, you can add them using this form.