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Is there a link between dollarization and banking crises?

  • Adam Honig

    (Department of Economics, Amherst College, USA)

I estimate a multivariate probit model to identify key variables that are predictive of banking crises. To add to the literature on this subject, I focus on the role played by unofficial dollarization of domestic banking systems. Unofficial dollarization is a source of vulnerability for emerging markets as large depreciations render both domestic firms and banks unable to pay dollar-denominated debt. Surprisingly, I find only weak evidence that unofficial dollarization affects the probability of a banking crisis. This finding casts doubt on the widely held belief that liability dollarization is a significant source of risk for emerging markets and developing nations, although there are still reasons to believe that dollarization remains a significant source of risk. Copyright © 2006 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jid.1285
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of International Development.

Volume (Year): 18 (2006)
Issue (Month): 8 ()
Pages: 1123-1135

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Handle: RePEc:wly:jintdv:v:18:y:2006:i:8:p:1123-1135
Contact details of provider: Web page: http://www3.interscience.wiley.com/journal/5102/home

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  1. Barry Eichengreen & Andrew K. Rose, 1998. "Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises," NBER Working Papers 6370, National Bureau of Economic Research, Inc.
  2. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  3. Eichengreen, Barry & Arteta, Carlos, 2000. "Banking Crises in Emerging Markets: Presumptions and Evidence," Center for International and Development Economics Research, Working Paper Series qt3pk9t1h2, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  4. Domac, Ilker & Martinez-Peria, Maria Soledad, 2000. "Banking crises and exchange rate regimes - Is there a link?," Policy Research Working Paper Series 2489, The World Bank.
  5. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
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  7. Roberto Chang & Andres Velasco, 1997. "Financial fragility and the exchange rate regime," Working Paper 97-16, Federal Reserve Bank of Atlanta.
  8. Honig, Adam, 2005. "Fear of floating and domestic liability dollarization," Emerging Markets Review, Elsevier, vol. 6(3), pages 289-307, September.
  9. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2001. "Hedging and financial fragility in fixed exchange rate regimes," European Economic Review, Elsevier, vol. 45(7), pages 1151-1193.
  10. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," IDB Publications (Working Papers) 5819, Inter-American Development Bank.
  11. Vicente Galbis, 1993. "High Real Interest Rates Under Financial Liberalization; Is there a Problem?," IMF Working Papers 93/7, International Monetary Fund.
  12. Mishkin, Frederic S, 1994. "Preventing Financial Crises: An International Perspective," The Manchester School of Economic & Social Studies, University of Manchester, vol. 62(0), pages 1-40, Suppl..
  13. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
  14. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
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