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Prudential Responses to De Facto Dollarization

  • Alain Ize
  • Andrew Powell

We develop a theoretical framework that encompasses four distinct motives for dollarization and discuss appropriate policy responses to help contain dollarization and its attendant risks. "Moral hazard" dollarization provides a clear case for prudential policy activism. However, prudential reform will have only a limited impact on dollarization when the main culprits are fear of floating and lack of monetary credibility. In such cases, a concerted and comprehensive reform agenda, including market-oriented and institutional reforms, would be needed to shift the balance of risks in favor of the domestic currency. While quantitative limits on dollarization could also be used to speed up de-dollarization, risks could be high.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/66.

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Length: 41
Date of creation: 01 Apr 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/66
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  1. Cowan, kevin & Quy-Toan Do, 2003. "Financial dollarization and central bank credibility," Policy Research Working Paper Series 3082, The World Bank.
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