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Financial dollarization: the role of banks and interest rates

Author

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  • Calvo-Gonzalez, Oscar
  • Basso, Henrique S.
  • Jurgilas, Marius

Abstract

This paper develops a model to explain the determinants of financial dollarization. Expanding on the existing literature, our framework allows interest rate differentials to play a role in explaining financial dollarization. It also accounts for the increasing presence of foreign banks in the local financial sector. Using a newly compiled data set on transition economies we find that increasing access to foreign funds leads to higher credit dollarization, while it decreases deposit dollarization. Interest rate differentials matter for the dollarization of both loans and deposits. Overall, the empirical results lend support to the predictions of our theoretical model. JEL Classification: E44, G21

Suggested Citation

  • Calvo-Gonzalez, Oscar & Basso, Henrique S. & Jurgilas, Marius, 2007. "Financial dollarization: the role of banks and interest rates," Working Paper Series 748, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2007748
    Note: 424448
    as

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    References listed on IDEAS

    as
    1. Ralph de Haas & Ilko Naaborg, 2005. "Internal Capital Markets in Multinational Banks: Implications for European Transition Countries," DNB Working Papers 051, Netherlands Central Bank, Research Department.
    2. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers.
    3. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.
    4. Mr. Alain Ize, 2005. "Financial Dollarization Equilibria: A Framework for Policy Analysis," IMF Working Papers 2005/186, International Monetary Fund.
    5. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
    6. Mr. Adolfo Barajas & Mr. Armando Méndez Morales, 2003. "Dollarization of Liabilities: Beyond the Usual Suspects," IMF Working Papers 2003/011, International Monetary Fund.
    7. Mr. Luis Catão & Mr. Marco Terrones, 2000. "Determinants of Dollarization: The Banking Side," IMF Working Papers 2000/146, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    financial dollarization; foreign banks; interest rate differentials; transition economies;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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