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Financial Dollarization and Dedollarization


  • Eduardo Fernández-Arias



Financial dollarization is a key factor behind systemic financial fragility in Latin America. The experience shows that dedollarization can be achieved but can just as easily be missed, and worse: blunt dedollarization measures that repress dollarization may easily fail to solve fragility and, instead, foster risky short-term debt or provoke massive financial disintermediation and crisis. This paper analyzes the sources of liability dollarization in a portfolio framework and identifies the failures leading to excessive dollarization that merit policy intervention as well as the reasons why dedollarization policy often goes awry. It then derives an analytically sound, multipronged domestic dedollarization program that takes into account the risks of misdiagnosis and the experiences, both successful and failed. This program centers around the development of good local currency substitutes for dollar debt, such as CPI-indexed debt, rather than the repression of dollar debt.

Suggested Citation

  • Eduardo Fernández-Arias, 2006. "Financial Dollarization and Dedollarization," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Spring 20), pages 37-100, January.
  • Handle: RePEc:col:000425:008653

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    Cited by:

    1. Jeta Menkulasi & Lodewyk Erasmus & Jules Leichter, 2009. "Dedollarization in Liberia-Lessons From Cross-Country Experience," IMF Working Papers 09/37, International Monetary Fund.

    More about this item


    dollarization; portfolio framework; policy intervention;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation


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