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Dollarization Persistence and Individual Heterogeneity

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Author Info
Paul Castillo (London School of Economics & Central bank of Peru)
Diego Winkelried (St John�s College, University of Cambridge)

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Abstract

The most salient feature of financial dollarization, and the one that causes more concern to policymakers, is its persistence: even after successful macroeconomic stabilizations, dollarization ratios often remain high. In this paper we claim that this persistence is connected to the fact that the participants in the dollar deposit market are fairly heterogenous, and so is the way they form their optimal currency portfolio. We develop a simple model when agents differ in their ability to process information, which turns out to be enough to generate persistence upon aggregation. We find empirical support for this claim with data from three Latin American countries and Poland.

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Publisher Info
Paper provided by EconWPA in its series Macroeconomics with number 0512014.

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Length: 25 pages
Date of creation: 21 Dec 2005
Date of revision: 31 Dec 2005
Handle: RePEc:wpa:wuwpma:0512014

Note: Type of Document - pdf; pages: 25
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Web page: http://129.3.20.41

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Related research
Keywords: Dollarization; individual heterogeneity; persistence; aggregation;

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Find related papers by JEL classification:
C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
F30 - International Economics - - International Finance - - - General

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References listed on IDEAS
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  4. Miguel A. Savastano, 1996. "Dollarization in Latin America - Recent Evidence and Some Policy Issues," IMF Working Papers 96/4, International Monetary Fund.
  5. Michelacci, Claudio, 2004. "Cross-sectional heterogeneity and the persistence of aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1321-1352, October. [Downloadable!] (restricted)
    Other versions:
  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. Hashem Pesaran, M., 2003. "Aggregation of linear dynamic models: an application to life-cycle consumption models under habit formation," Economic Modelling, Elsevier, vol. 20(2), pages 383-415, March. [Downloadable!] (restricted)
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  9. Zaffaroni, Paolo, 2004. "Contemporaneous aggregation of linear dynamic models in large economies," Journal of Econometrics, Elsevier, vol. 120(1), pages 75-102, May. [Downloadable!] (restricted)
  10. Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July. [Downloadable!] (restricted)
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  15. Agenor, Pierre-Richard & Haque, Nadeem U, 1996. "Macroeconomic Management with Informal Financial Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(2), pages 87-101, April. [Downloadable!] (restricted)
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  16. Sturzenegger, Federico, 1997. "Understanding the welfare implications of currency substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 391-416. [Downloadable!] (restricted)
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  19. Pablo Guidotti & Carlos A. Rodríguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," CEMA Working Papers: Serie Documentos de Trabajo. 81, Universidad del CEMA. [Downloadable!]
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  25. repec:rus:hseeco:124089 is not listed on IDEAS
  26. repec:rus:hseeco:123906 is not listed on IDEAS
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Cited by:
(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. Carlos E. León Rincón & Alejandro Revéiz Herault, 2008. "La dolarización financiera: experiencia internacional y perspectivas para Colombia," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 10(18), pages 313-341, January-J. [Downloadable!]
    Other versions:
  2. Paul Castillo & Alberto Humala & Vicente Tuesta, 2007. "Monetary Policy, Regime Shifts, and Inflation Uncertainty in Peru (1949-2006)," Working Papers 2007-005, Banco Central de Reserva del Perú. [Downloadable!]
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