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Dollarization, exchange rate regimes and government quality

  • Honig, Adam

The dollarization of the domestic banking system represents a source of vulnerability for emerging market countries, and a debate has emerged over whether the exchange rate regime has an impact on dollarization. This paper argues that the regime is far less important than the literature has previously claimed. Unofficial dollarization results from a lack of faith in the domestic currency, which ultimately stems from the belief that the government will not follow policies that promote long-run currency stability. Empirical results indicate that improved government quality reduces unofficial dollarization, while the exchange rate regime plays no direct role in promoting dollarization.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 28 (2009)
Issue (Month): 2 (March)
Pages: 198-214

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Handle: RePEc:eee:jimfin:v:28:y:2009:i:2:p:198-214
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Guillermo Calvo & Carlos A. Végh Gramont, 1992. "Currency Substitution in Developing Countries; An Introduction," IMF Working Papers 92/40, International Monetary Fund.
  2. 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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  7. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
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  20. Honig, Adam, 2005. "Fear of floating and domestic liability dollarization," Emerging Markets Review, Elsevier, vol. 6(3), pages 289-307, September.
  21. repec:dgr:rugccs:200101 is not listed on IDEAS
  22. Arteta Carlos O., 2005. "Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Currency Mismatches in Bank Intermediation?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-30, May.
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  25. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
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