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Deposit Dollarization and Its Impact on Financial Deepening in the Developing World

Listed author(s):
  • Eduardo Court

    (Pontificia Universidad Catolica Del Peru, Centrum Catolica)

  • Emre Ozsoz

    (Fashion Institute of Technology, State University of New York (SUNY), Social Sciences Department, and Fordham University, Center for International Policy Studies (CIPS))

  • Erick W. Rengifo

    (Fordham University, Department of Economics and Center for International Policy Studies (CIPS))

One of the main reasons for dollarization is the erosion of money's function as a store of value as the Currency Substitution view suggests. It has not been uncommon for countries with high inflationary processes to have high dollarization ratios and banking system that faces important challenges and risks that significantly affect their ability to provide capital to the overall economy (financial intermediation). In these economies, dollarization played a dual role: in one hand, the role of a hedging instrument protecting the value of money and, in the other hand, contributing to generate the so-called currency mismatch and default risks. This paper investigates the role of dollarization on the development of financial intermediation in developing economies. Our empirical findings suggest that dollarization has a negative impact on financial deepening, except on high-inflation economies.

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Paper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2010-08.

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Date of creation: 2010
Handle: RePEc:frd:wpaper:dp2010-08
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  1. Nicolo, Gianni De & Honohan, Patrick & Ize, Alain, 2005. "Dollarization of bank deposits: Causes and consequences," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1697-1727, July.
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