IDEAS home Printed from https://ideas.repec.org/p/hit/remfce/22.html
   My bibliography  Save this paper

Regional Inflation and Financial Dollarization

Author

Listed:
  • Brown, Martin
  • Haas, Ralph De
  • Sokolov, Vladimir

Abstract

We exploit variation in consumer price inflation across 71 Russian regions to examine the relationship between the perceived stability of the domestic currency and financial dollarization. Our results show that regions with higher inflation experience an increase in deposit dollarization and a decrease in the dollarization of loans to households and firms in non-tradable sectors. The negative impact of inflation on credit dollarization is weaker in regions with less integrated banking markets. This suggests that the asset-liability management of banks constrains the currency-portfolio choices of both households and firms without a natural currency hedge.

Suggested Citation

  • Brown, Martin & Haas, Ralph De & Sokolov, Vladimir, 2015. "Regional Inflation and Financial Dollarization," HIT-REFINED Working Paper Series 22, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:remfce:22
    as

    Download full text from publisher

    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/27309/wp022.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Özbilgin, Murat H., 2012. "Currency substitution, inflation, and welfare," Journal of Development Economics, Elsevier, vol. 99(2), pages 358-369.
    2. Dan Galai & Zvi Wiener, 2012. "Credit Risk Spreads in Local and Foreign Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 883-901, August.
    3. Fratzscher, Marcel & Rime, Dagfinn & Sarno, Lucio & Zinna, Gabriele, 2015. "The scapegoat theory of exchange rates: the first tests," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 1-21.
    4. Martin Brown & Steven Ongena & Pinar Yeşin, 2014. "Information Asymmetry and Foreign Currency Borrowing by Small Firms," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 56(1), pages 110-131, March.
    5. J. Bradford Jensen & Lori G. Kletzer, 2005. "Tradable Services: Understanding the Scope and Impact of Services Outsourcing," Working Paper Series WP05-9, Peterson Institute for International Economics.
    6. Ms. Mercedes Garcia-Escribano & Mr. Sebastian Sosa, 2011. "What is Driving Financial De-Dollarization in Latin America?," IMF Working Papers 2011/010, International Monetary Fund.
    7. Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, vol. 96(3), pages 552-576, June.
    8. Loutskina, Elena & Strahan, Philip E., 2015. "Financial integration, housing, and economic volatility," Journal of Financial Economics, Elsevier, vol. 115(1), pages 25-41.
    9. Shu Lin & Haichun Ye, 2013. "Does Inflation Targeting Help Reduce Financial Dollarization?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(7), pages 1253-1274, October.
    10. Uribe, Martin, 1997. "Hysteresis in a simple model of currency substitution," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 185-202, September.
    11. 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.
    12. Brown, M. & Kirschenmann, K. & Ongena, S., 2009. "Foreign Currency Loans - Demand or Supply Driven?," Other publications TiSEM 75ee4df5-492e-4e1f-8dc4-3, Tilburg University, School of Economics and Management.
    13. Andrea Vaona & Guido Ascari, 2012. "Regional Inflation Persistence: Evidence from Italy," Regional Studies, Taylor & Francis Journals, vol. 46(4), pages 509-523, June.
    14. Winkelried, Diego & Castillo, Paul, 2010. "Dollarization persistence and individual heterogeneity," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1596-1618, December.
    15. Beckmann, Elisabeth & Stix, Helmut, 2015. "Foreign currency borrowing and knowledge about exchange rate risk," Journal of Economic Behavior & Organization, Elsevier, vol. 112(C), pages 1-16.
    16. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
    17. Fuhrer, Jeffrey C., 2010. "Inflation Persistence," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 9, pages 423-486, Elsevier.
    18. Calvo, Guillermo A, 2001. "Capital Markets and the Exchange Rate with Special Reference to the Dollarization Debate in Latin America," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 312-334, May.
    19. Stix, Helmut, 2013. "Why do people save in cash? Distrust, memories of banking crises, weak institutions and dollarization," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4087-4106.
    20. Martin Brown & Ralph De Haas, 2012. "Foreign banks and foreign currency lending in emerging Europe [Capital structure and financial risk: evidence from foreign debt use in East Asia]," Economic Policy, CEPR;CES;MSH, vol. 27(69), pages 57-98.
    21. Brown, Martin & Ongena, Steven & Yesin, Pinar, 2011. "Foreign currency borrowing by small firms in the transition economies," Journal of Financial Intermediation, Elsevier, vol. 20(3), pages 285-302, July.
    22. De Gregorio, Jose & Giovannini, Alberto & Wolf, Holger C., 1994. "International evidence on tradables and nontradables inflation," European Economic Review, Elsevier, vol. 38(6), pages 1225-1244, June.
    23. K. J. Martijn Cremers & Rocco Huang & Zacharias Sautner, 2011. "Internal Capital Markets and Corporate Politics in a Banking Group," Review of Financial Studies, Society for Financial Studies, vol. 24(2), pages 358-401.
    24. Konstantin Gluschenko, 2010. "Price mobility of locations," Applied Economics Letters, Taylor & Francis Journals, vol. 17(1), pages 99-103, January.
    25. Rogers, John H., 2007. "Monetary union, price level convergence, and inflation: How close is Europe to the USA?," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 785-796, April.
    26. Alexei Karas & William Pyle & Koen Schoors, 2013. "Deposit Insurance, Banking Crises, and Market Discipline: Evidence from a Natural Experiment on Deposit Flows and Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 179-200, February.
    27. Martin Brown & Karolin Kirschenmann & Steven Ongena, 2014. "Bank Funding, Securitization, and Loan Terms: Evidence from Foreign Currency Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(7), pages 1501-1534, October.
    28. Thaler, Richard H, 1990. "Saving, Fungibility, and Mental Accounts," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 193-205, Winter.
    29. Mian, Shehzad L., 1996. "Evidence on Corporate Hedging Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 419-439, September.
    30. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
    31. Donald Morgan & Bertrand Rime & Philip Strahan, 2003. "Bank Integration and State Business Cycles," NBER Working Papers 9704, National Bureau of Economic Research, Inc.
    32. Valev, Neven T., 2010. "The hysteresis of currency substitution: Currency risk vs. network externalities," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 224-235, March.
    33. Nagayasu, Jun, 2011. "Heterogeneity and convergence of regional inflation (prices)," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 711-723.
    34. Beck, Thorsten & Brown, Martin, 2011. "Which households use banks? Evidence from the transition economies," Working Paper Series 1295, European Central Bank.
    35. Craig, Ben & Waller, C.J.Christopher J., 2004. "Dollarization and currency exchange," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 671-689, May.
    36. Masami Imai & Seitaro Takarabe, 2011. "Bank Integration and Transmission of Financial Shocks: Evidence from Japan," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 155-183, January.
    37. Basso, Henrique S. & Calvo-Gonzalez, Oscar & Jurgilas, Marius, 2011. "Financial dollarization: The role of foreign-owned banks and interest rates," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 794-806, April.
    38. Глущенко К.П., 2001. "Пространственное Поведение Уровней Цен," Журнал Экономика и математические методы (ЭММ), Центральный Экономико-Математический Институт (ЦЭМИ), vol. 37(3), июль.
    39. repec:onb:oenbwp:y::i:178:b:1 is not listed on IDEAS
    40. Engineer, Merwan, 2000. "Currency transactions costs and competing fiat currencies," Journal of International Economics, Elsevier, vol. 52(1), pages 113-136, October.
    41. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
    42. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    43. Donald P. Morgan & Bertrand Rime & Philip E. Strahan, 2004. "Bank Integration and State Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 119(4), pages 1555-1584.
    44. Luca, Alina & Petrova, Iva, 2008. "What drives credit dollarization in transition economies?," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 858-869, May.
    45. Myatt, David P. & Wallace, Chris, 2014. "Central bank communication design in a Lucas-Phelps economy," Journal of Monetary Economics, Elsevier, vol. 63(C), pages 64-79.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Davydova, Yulia & Sokolov, Vladimir, 2014. "The real effects of financial constraints: Evidence from a debt subsidization program targeted at strategic firms," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 247-265.
    2. Ibrahim D. Raheem, 2018. "Inflation rate of 14–16% is fair for the sub-Saharan African dollarization," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(4), pages 779-794, October.
    3. Aiba, Daiju & Odajima, Ken & Khou, Vouthy, 2017. "Foreign Currency Borrowing and Risk-Hedging Behavior: Evidence from a Household Survey in Cambodia," Working Papers 143, JICA Research Institute.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. de Haas, R. & Brown, M. & Sokolov, V., 2015. "Regional Inflation, Financial Integration and Dollarization (This is a revision of CentER DP 2013-073)," Discussion Paper 2015-012, Tilburg University, Center for Economic Research.
    2. Brown, Martin & De Haas, Ralph & Sokolov, Vladimir, 2013. "Regional Inflation and Financial Dollarization," Working Papers on Finance 1327, University of St. Gallen, School of Finance.
    3. de Haas, R. & Brown, M. & Sokolov, V., 2015. "Regional Inflation, Financial Integration and Dollarization," Other publications TiSEM ef569549-635c-490c-b44c-2, Tilburg University, School of Economics and Management.
    4. repec:ebd:wpaper:163 is not listed on IDEAS
    5. Martin Brown & Helmut Stix, 2015. "The euroization of bank deposits in Eastern Europe," Economic Policy, CEPR;CES;MSH, vol. 30(81), pages 95-139.
    6. Martin Brown & Steven Ongena & Pinar Yeşin, 2014. "Information Asymmetry and Foreign Currency Borrowing by Small Firms," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 56(1), pages 110-131, March.
    7. Harasztosi, Péter & Kátay, Gábor, 2020. "Currency matching by non-financial corporations," Journal of Banking & Finance, Elsevier, vol. 113(C).
    8. Fidrmuc, Jarko & Hake, Mariya & Stix, Helmut, 2013. "Households’ foreign currency borrowing in Central and Eastern Europe," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1880-1897.
    9. Vonnák, Dzsamila, 2018. "Why do firms default on their foreign currency loans? The case of Hungary," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 207-222.
    10. Sung C. Bae & Hyeon Sook Kim & Taek Ho Kwon, 2020. "Foreign currency borrowing surrounding the global financial crisis: Evidence from Korea," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(5-6), pages 786-817, May.
    11. Judit Temesvary, 2016. "The drivers of foreign currency-based banking in Central and Eastern Europe," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 24(2), pages 233-257, April.
    12. Aiba, Daiju & Odajima, Ken & Khou, Vouthy, 2017. "Foreign Currency Borrowing and Risk-Hedging Behavior: Evidence from a Household Survey in Cambodia," Working Papers 143, JICA Research Institute.
    13. Bryan Hardy, 2018. "Foreign currency borrowing, balance sheet shocks and real outcomes," BIS Working Papers 758, Bank for International Settlements.
    14. Beckmann, Elisabeth & Stix, Helmut, 2015. "Foreign currency borrowing and knowledge about exchange rate risk," Journal of Economic Behavior & Organization, Elsevier, vol. 112(C), pages 1-16.
    15. Marcelin, Isaac & Mathur, Ike, 2016. "Financial sector development and dollarization in emerging economies," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 20-32.
    16. Niepmann, Friederike & Schmidt-Eisenlohr, Tim, 2022. "Foreign currency loans and credit risk: Evidence from U.S. banks," Journal of International Economics, Elsevier, vol. 135(C).
    17. Aiba, Daiju & Odajima, Ken & Khou, Vouthy, 2018. "Foreign currency borrowing and risk-hedging behavior: Evidence from Cambodian households," Journal of Asian Economics, Elsevier, vol. 58(C), pages 19-35.
    18. Dzsamila Vonnak, 2015. "Decomposing the Riskiness of Corporate Foreign Currency Lending: the Case of Hungary," CERS-IE WORKING PAPERS 1528, Institute of Economics, Centre for Economic and Regional Studies.
    19. Thomas Scheiber & Caroline Stern, 2016. "Currency substitution in CESEE: why do households prefer euro payments?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 73-98.
    20. Shijaku, Gerti, 2016. "Foreign currency lending in Albania," MPRA Paper 79087, University Library of Munich, Germany.
    21. Crespo Cuaresma, Jesús & Fidrmuc, Jarko & Hake, Mariya, 2014. "Demand and supply drivers of foreign currency loans in CEECs: A meta-analysis," Economic Systems, Elsevier, vol. 38(1), pages 26-42.

    More about this item

    Keywords

    Financial dollarization; financial integration; regional inflation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • P22 - Economic Systems - - Socialist Systems and Transition Economies - - - Prices
    • P24 - Economic Systems - - Socialist Systems and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hit:remfce:22. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/iehitjp.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Digital Resources Section, Hitotsubashi University Library (email available below). General contact details of provider: https://edirc.repec.org/data/iehitjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.