Addressing private sector currency mismatches in emerging Europe
This paper provides a survey of the theoretical and empirical literature on the dollarisation of corporate and household liabilities; presents evidence on the causes of FX lending specifically in transition economies; and proposes a set of criteria to help decide on the right policy response based on country characteristics. These criteria particularly affect the extent to which regulation should be part of the policy response. Regulation to contain FX mismatches is useful in relatively advanced countries in which small market size and/or proximity to the euro make it difficult to fully develop local currency capital markets. In contrast, regulatory responses could be counterproductive in less advanced countries with high macroeconomic volatility. In these countries, the route to de-dollarisation first and foremost requires the strengthening of macroeconomic institutions.
|Date of creation:||Jun 2010|
|Date of revision:|
|Publication status:||Forthcoming in "Financial Market Regulation and Reforms in Emerging Markets", Masahiro Kawai and Eswar Prasad, eds., Brookings Institution Press 2010.|
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