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Exchange Rate Policy and Liability Dollarization: What do the Data Reveal about Causality?

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  • S. Pelin Berkmen
  • Eduardo Cavallo

Abstract

The paper identifies the contemporaneous relationship between exchange rate policy and liability dollarization using three different definitions of dollarization. The presence of endogeneity makes the empirical identification elusive. We use identification through heteroskedasticity to solve the endogeneity problem in the present context ( Rigobon, 2003 ). While we find that countries with high liability dollarization (external, public, or financial) tend to be more actively involved in exchange rate stabilization operations, we do not find evidence that floating, by itself, promotes de-dollarization. Copyright © 2010 Blackwell Publishing Ltd.

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  • S. Pelin Berkmen & Eduardo Cavallo, 2010. "Exchange Rate Policy and Liability Dollarization: What do the Data Reveal about Causality?," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 781-795, November.
  • Handle: RePEc:bla:reviec:v:18:y:2010:i:5:p:781-795
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    References listed on IDEAS

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    1. Hausmann, Ricardo & Panizza, Ugo, 2003. "On the determinants of Original Sin: an empirical investigation," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 957-990, December.
    2. Devereux, Michael B. & Lane, Philip R., 2003. "Understanding bilateral exchange rate volatility," Journal of International Economics, Elsevier, vol. 60(1), pages 109-132, May.
    3. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-484, December.
    4. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    5. Ricardo Caballero & Kevin Cowan & Jonathan Kearns, 2005. "Fear of Sudden Stops: Lessons From Australia and Chile," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 8(4), pages 313-354.
    6. Valerie Cerra & Sweta Chaman Saxena, 2008. "Growth Dynamics: The Myth of Economic Recovery," American Economic Review, American Economic Association, vol. 98(1), pages 439-457, March.
    7. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
    8. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
    9. Honig, Adam, 2009. "Dollarization, exchange rate regimes and government quality," Journal of International Money and Finance, Elsevier, vol. 28(2), pages 198-214, March.
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    Cited by:

    1. Mykhaylova Olena & Staveley-O’Carroll James, 2014. "International transmission of productivity shocks with nonzero net foreign debt," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 1-46, January.
    2. Raheem, Ibrahim D. & Asongu, Simplice A., 2016. "Extending the Determinants of Dollarization in Sub-Saharan Africa: The Role of Easy Access to Foreign Exchange Earnings," MPRA Paper 75415, University Library of Munich, Germany.
    3. Vieira, Fabrício A.C. & Holland, Márcio & Resende, Marco F., 2012. "Financial dollarization and systemic risks: New empirical evidence," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1695-1714.
    4. Mercedes Garcia-Escribano & Sebastian Sosa, 2011. "What is Driving Financial De-Dollarization in Latin America?," IMF Working Papers 11/10, International Monetary Fund.
    5. Habib, Maurizio Michael & Mileva, Elitza & Stracca, Livio, 2017. "The real exchange rate and economic growth: Revisiting the case using external instruments," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 386-398.
    6. Lula G. Mengesha & Mark J. Holmes, 2013. "Does Dollarization Alleviate Or Aggravate Exchange Rate Volatility?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 99-118, June.
    7. Chiţu, Livia, 2012. "Was unofficial dollarisation/euroisation an amplifier of the 'Great Recession' of 2007-09 in emerging economies," Working Paper Series 1473, European Central Bank.

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