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Dollarization of the Banking System; Good or Bad?

  • Gianni De Nicoló
  • Patrick Honohan
  • Alain Ize

This paper assesses the benefits and risks associated with dollarization of the banking system. We provide novel empirical evidence on the determinants of dollarization, its role in promoting financial development, and on whether dollarization is associated with financial instability. We find that: (a) the credibility of macroeconomic policy and the quality of institutions are both key determinants of cross-country variations in dollarization; (b) dollarization is likely to promote financial deepening only in a high inflation environment; and (c) financial instability is likely higher in dollarized economies. The implications of these findings for financial sector and monetary policies are discussed.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/146.

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Length: 43
Date of creation: 01 Jul 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/146
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  1. Christian Broda & Eduardo Levy Yeyati, 2003. "Endogenous Deposit Dollarization," Business School Working Papers dieciseis, Universidad Torcuato Di Tella.
  2. Honohan, Patrick & Shi, Anging, 2001. "Deposit dollarization and the financial sector in emerging economies," Policy Research Working Paper Series 2748, The World Bank.
  3. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-50, July.
  4. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084 Central Bank of Chile.
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  6. Michael Mussa, 2002. "Argentina and the Fund: From Triumph to Tragedy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa67.
  7. Gianni De Nicolo, 2000. "Size, charter value and risk in banking: an international perspective," International Finance Discussion Papers 689, Board of Governors of the Federal Reserve System (U.S.).
  8. Levy-Yeyati, Eduardo & Sturzenegger, Federico & Reggio, Iliana, 2006. "On the Endogeneity of Exchange Rate Regimes," Working Paper Series rwp06-047, Harvard University, John F. Kennedy School of Government.
  9. Michael P. Dooley, 1998. "A model of crises in emerging markets," International Finance Discussion Papers 630, Board of Governors of the Federal Reserve System (U.S.).
  10. Martin Schneider & Aaron Tornell, 2004. "Balance Sheet Effects, Bailout Guarantees and Financial Crises," Review of Economic Studies, Wiley Blackwell, vol. 71, pages 883-913, 07.
  11. Adolfo Barajas & Armando Méndez Morales, 2003. "Dollarization of Liabilities; Beyond the Usual Suspects," IMF Working Papers 03/11, International Monetary Fund.
  12. Miguel A. Savastano, 1996. "Dollarization in Latin America; Recent Evidence and Some Policy Issues," IMF Working Papers 96/4, International Monetary Fund.
  13. Viceira, Luis & Campbell, John & White, Joshua, 2003. "Foreign Currency for Long-Term Investors," Scholarly Articles 3128708, Harvard University Department of Economics.
  14. Olivier Jeanne, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," IMF Working Papers 03/177, International Monetary Fund.
  15. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
  16. 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.
  17. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "A Corporate Balance Sheet Approach to Currency Crises," CEPR Discussion Papers 3092, C.E.P.R. Discussion Papers.
  18. Dalia Hakura & Ehsan U. Choudhri, 2001. "Exchange Rate Pass-Through to Domestic Prices; Does the Inflationary Environment Matter?," IMF Working Papers 01/194, International Monetary Fund.
  19. John D. Burger & Francis E. Warnock, 2003. "Diversification, original sin, and international bond portfolios," International Finance Discussion Papers 755, Board of Governors of the Federal Reserve System (U.S.).
  20. John H. Cochrane, 1999. "New facts in finance," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 36-58.
  21. Andrew Berg & Eduardo Borensztein, 2000. "The Choice of Exchange Rate Regime and Monetary Target in Highly Dollarized Economies," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 285-324, November.
  22. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
  23. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," IDB Publications (Working Papers) 6467, Inter-American Development Bank.
  24. de la Torre, Augusto & Levy Yeyati, Eduardo & Schmukler, Sergio L, 2002. "Financial Globalization: Unequal Blessings," International Finance, Wiley Blackwell, vol. 5(3), pages 335-57, Winter.
  25. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Governance matters," Policy Research Working Paper Series 2196, The World Bank.
  26. Gianni De Nicoló & M. G. Zephirin & Philip F. Bartholomew & Jahanara Zaman, 2003. "Bank Consolidation, Internationalization and Conglomeration; Trends and Implications for Financial Risk," IMF Working Papers 03/158, International Monetary Fund.
  27. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization; The Banking Side," IMF Working Papers 00/146, International Monetary Fund.
  28. McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, vol. 87(2), pages 189-93, May.
  29. Carlos O. Arteta, 2003. "Are financially dollarized countries more prone to costly crises?," International Finance Discussion Papers 763, Board of Governors of the Federal Reserve System (U.S.).
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