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Dollarization of the banking system : good or bad?

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  • De Nicolo, Gianni
  • Honohan, Patrick
  • Ize, Alain

Abstract

De Nicol? Honohan, and Ize assess the benefits and risks associated with dollarization of the banking system. The authors provide novel empirical evidence on the determinants of dollarization, its role in promoting financial development, and on whether dollarization is associated with financial instability. They find that: The credibility of macroeconomic policy and the quality of institutions are both key determinants of cross-country variations in dollarization. Dollarization is likely to promote financial deepening only in a high inflation environment. Financial instability is likely higher in dollarized economies. The authors discuss the implications of these findings for financial sector and monetary policies.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3116.

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Date of creation: 31 Aug 2003
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Handle: RePEc:wbk:wbrwps:3116

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

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References

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  1. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
  2. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-50, July.
  3. Honohan, Patrick & Shi, Anging, 2001. "Deposit dollarization and the financial sector in emerging economies," Policy Research Working Paper Series 2748, The World Bank.
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  8. Gianni De Nicolo, 2000. "Size, charter value and risk in banking: an international perspective," International Finance Discussion Papers 689, Board of Governors of the Federal Reserve System (U.S.).
  9. John Y. Campbell & Luis M. Viceira & Joshua S. White, 2003. "Foreign Currency for Long-Term Investors," Economic Journal, Royal Economic Society, vol. 113(486), pages C1-C25, March.
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  18. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers.
  19. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
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  22. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
  23. McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, vol. 87(2), pages 189-93, May.
  24. Garber, Peter M, 1996. "Managing Risks to Financial Markets from Volatile Capital Flows: The Role of Prudential Regulation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 183-95, July.
  25. Eduardo Borensztein & Andrew Berg, 2000. "The Choice of Exchange Rate Regime and Monetary Target in Highly Dollarized Economies," IMF Working Papers 00/29, International Monetary Fund.
  26. Miguel A. Savastano, 1996. "Dollarization in Latin America - Recent Evidence and Some Policy Issues," IMF Working Papers 96/4, International Monetary Fund.
  27. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization - The Banking Side," IMF Working Papers 00/146, International Monetary Fund.
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