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Living with Dollarization and the Route to Dedollarization

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  • Arturo Galindo

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  • Leonardo Leiderman

Abstract

Financial dollarization in Latin America has been growing over time in spite of a major reduction in inflation and a shift toward central bank independence. After discussing the key stylized facts of dollarization and dedollarization in the region, we discuss the risks this process poses to the region. In particular, we explore the validity of concerns about the effectiveness of monetary policy in a dollarized economy and about a loss of seigniorage revenue in such an economy. After concluding that to a large extent these concerns lack empirical support, we focus on the main reason for concern: increased vulnerability due to the dollarization of public and private debt. We emphasize the importance of precautionary/regulatory measures to limit the scope of mismatches originating from liability dollarization, and of developing financial instruments designed to hedge against currency risk. Moreover, we deal with the experience of policies directly aimed at deepening domestic financial markets in local currency assets and in gradually lengthening the maturity of these assets. We find that important lessons from the experience of dedollarization in Israel are of particular interest for Latin America.

Suggested Citation

  • Arturo Galindo & Leonardo Leiderman, 2005. "Living with Dollarization and the Route to Dedollarization," Research Department Publications 4397, Inter-American Development Bank, Research Department.
  • Handle: RePEc:idb:wpaper:4397
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    Cited by:

    1. Galindo, Arturo & Izquierdo, Alejandro & Montero, Jose Manuel, 2007. "Real exchange rates, dollarization and industrial employment in Latin America," Emerging Markets Review, Elsevier, vol. 8(4), pages 284-298, December.
    2. Kessy, Pantaleo, 2011. "Dollarization in Tanzania: empirical evidence and cross-country experience," LSE Research Online Documents on Economics 36381, London School of Economics and Political Science, LSE Library.
    3. Sok Heng Lay & Makoto Kakinaka & Koji Kotani, 2010. "Exchange Rate Movements in a Dollarized Economy: The Case of Cambodia," Working Papers EMS_2010_18, Research Institute, International University of Japan.
    4. Edmar L. Bacha & Márcio Holland & Fernando M. Gonçalves, 2007. "Is Brazil Different? Risk, Dollarization, And Interest In Emerging Markets," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 028, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    5. Eduardo Levy Yeyati & Alain Ize, 2005. "Financial De-Dollarization; Is it for Real?," IMF Working Papers 05/187, International Monetary Fund.
    6. Sanchez Alan, 2006. "Financial Dollarization, the portfolio approach and expectations: evidence for Latin America (1995-2005)," Working Papers 2006-010, Banco Central de Reserva del Perú.
    7. Barbara Fritz & Laurissa Mühlich, 2006. "Regional Monetary Integration among Developing Countries: New Opportunities for Macroeconomic Stability beyond the Theory of Optimum Currency Areas?," GIGA Working Paper Series 38, GIGA German Institute of Global and Area Studies.
    8. Márcio Holland & Edmar L. Bacha & Fernando M. Gonçalves, 2007. "Is Brazil Different? Risk, Dollarization, and Interest Rates in Emerging Markets," IMF Working Papers 07/294, International Monetary Fund.
    9. Metin-Özcan, Kıvılcım & Us, Vuslat, 2007. "Dedollarization in Turkey after decades of dollarization: A myth or reality?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 385(1), pages 292-306.
    10. Halil Ibrahim Aydin & Cafer Kaplan & Mehtap Kesriyeli & Erdal Ozmen & Cihan Yalcin & Serkan Yigit, 2006. "Corporate Sector Financial Structure in Turkey : A Descriptive Analysis," Working Papers 0607, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    11. Jeta Menkulasi & Lodewyk Erasmus & Jules Leichter, 2009. "Dedollarization in Liberia-Lessons From Cross-Country Experience," IMF Working Papers 09/37, International Monetary Fund.
    12. Ozge Akinci & Yasemin Barlas Ozer & Bulent Usta, 2005. "Dolarizasyon Endeksleri : Turkiye’deki Dolarizasyon Surecine Iliskin Gostergeler," Working Papers 0517, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    13. Tobal Martín, 2017. "Currency Mismatch in the Banking Sector in Latin America and the Caribbean," Working Papers 2017-05, Banco de México.
    14. Gokhan Yilmaz, 2005. "Financial Dollarization, (De)Dollarization and The Turkish Experience," Working Papers 2005/6, Turkish Economic Association.
    15. Martín Tobal, 2013. "Currency Mismatch: New Database and Indicators for Latin America and the Caribbean," Documentos de Investigación - Research Papers 12, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    16. Bacha, Edmar & Holland, Marcio & Gonçalves, Fernando M., 2009. "Dolarização financeira, taxa de juros, economias emergentes, análise em painel, Brasil," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 63(4), December.
    17. Sánchez, Alan, 2007. "Dolarización financiera, el enfoque de portafolio y expectativas: Evidencia para América Latina (1995-2005)," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 14, pages 107-130.
    18. Windischbauer, Ulrich, 2016. "Strengthening the role of local currencies in EU candidate and potential candidate countries," Occasional Paper Series 170, European Central Bank.

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