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Deposit dollarization and the financial sector in emerging economies

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  • Honohan, Patrick
  • Shi, Anging

Abstract

Analyzing new data, the authors find that the general trend toward increased use of foreign-currency-denominated bank deposits in emerging markets has continued, despite declines in a few countries. Their analysis of the new data suggests that a sizable fraction (about half, on average) of funds switched to dollar deposit accounts are effectively exported through the banking system, thereby reducing the supply of credit. Moreover, increases in deposit dollarization are associated with increases in offshore deposits, which probably helps to explain the authors'finding that dollarization is associated with an increase in banking spreads. The authors'evidence supports, though only weakly, the conjecture that dollarization would tend to raise wholesale interest rates systematically through a peso premium. In contrast, greater dollarization is clearly associated with a higher pass-through coefficient from exchange rate change to consumer prices, potentially increasing nominal risk in the economy.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2748.

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Date of creation: 31 Dec 2001
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Handle: RePEc:wbk:wbrwps:2748

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Related research

Keywords: Economic Theory&Research; Payment Systems&Infrastructure; Banks&Banking Reform; Fiscal&Monetary Policy; Financial Intermediation; Banks&Banking Reform; Economic Theory&Research; Macroeconomic Management; Financial Economics; Financial Intermediation;

References

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  1. Andrew Berg & Eduardo Borensztein, 2000. "The Choice of Exchange Rate Regime and Monetary Target in Highly Dollarized Economies," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 285-324, November.
  2. Frederic S. Mishkin & Miguel A. Savastano, 2000. "Monetary Policy Strategies for Latin America," NBER Working Papers 7617, National Bureau of Economic Research, Inc.
  3. Uribe, Martin, 1997. "Hysteresis in a simple model of currency substitution," Journal of Monetary Economics, Elsevier, Elsevier, vol. 40(1), pages 185-202, September.
  4. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," Research Department Publications, Inter-American Development Bank, Research Department 4205, Inter-American Development Bank, Research Department.
  5. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 13(4), pages 85-104, Fall.
  6. Ilan Goldfajn & Sergio R.C. Werlang, 2000. "The pass-through from depreciation to inflation : a panel study," Textos para discussão, Department of Economics PUC-Rio (Brazil) 423, Department of Economics PUC-Rio (Brazil).
  7. Pablo E. Guidotti & Carlos A. Rodriguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 518-544, September.
  8. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization," IMF Working Papers 00/146, International Monetary Fund.
  9. John H. Cochrane, 1999. "New Facts in Finance," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 490, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  10. repec:fth:inadeb:418 is not listed on IDEAS
  11. Ilan Goldfajn & Roberto Rigobon, 2000. "Hard currency and financial development," Textos para discussão, Department of Economics PUC-Rio (Brazil) 438, Department of Economics PUC-Rio (Brazil).
  12. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
  13. Girton, Lance & Roper, Don E, 1981. "Theory and Implications of Currency Substitution," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 13(1), pages 12-30, February.
  14. Ronald I. McKinnon, 1996. "The Rules of the Game: International Money and Exchange Rates," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262133180, December.
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