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Financial Dollarization and Currency Substitution. An Empirical Study for Bolivia America than in Asia?

  • Salvatore Dell'Erba
  • Martin Saldías Zambrana

The Bolivian puzzle is high and persistent financial dollarization notwithstanding deep macroeconomic stabilization that achieved stable and low inflation and the regulations encouraging domestic currency deposits. We analyze traditional and new approaches to explain dollarization in Bolivia. We first assess the currency substitution approach and then assess the empirical evidence for the financial dollarization approach. The results show that the macroeconomic variables capture only partially the phenomenon and a better assessment relies on other explanations such as the peso problem and the analysis of specific characteristics of the financial markets in Bolivia.

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Paper provided by Kiel Institute for the World Economy in its series Kiel Advanced Studies Working Papers with number 432.

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Length: 32 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:kie:kieasw:432
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  1. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
  2. Melvin, Michael & Ladman, Jerry, 1991. "Coca Dollars and the Dollarization of South America," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(4), pages 752-63, November.
  3. Juan F. Castro & Eduardo Morón, 2005. "Financial Dollarization and the Size of the Fear," Macroeconomics 0509027, EconWPA.
  4. Calvo, Guillermo & Vegh, Carlos, 1992. "Currency Substitution in Developing Countries: An Introduction," MPRA Paper 20338, University Library of Munich, Germany.
  5. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
  6. Juan Antonio Morales Anaya, 2003. "Dollarization of assets and liabilities: Problem or solution?. The case of Bolivia," Revista de Análisis del BCB, Banco Central de Bolivia, vol. 6(1), pages 7-39, June.
  7. Eduardo Levy Yeyati, 2005. "Financial Dollarisation: Evaluating The Consequences," Business School Working Papers findollarisation, Universidad Torcuato Di Tella.
  8. Pablo Guidotti & Carlos A. Rodríguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," CEMA Working Papers: Serie Documentos de Trabajo. 81, Universidad del CEMA.
  9. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
  10. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  11. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  12. Eduardo Levy Yeyati & Alain Ize, 1998. "Dollarization of Financial Intermediation; Causes and Policy Implications," IMF Working Papers 98/28, International Monetary Fund.
  13. Adolfo Barajas & Armando Méndez Morales, 2003. "Dollarization of Liabilities; Beyond the Usual Suspects," IMF Working Papers 03/11, International Monetary Fund.
  14. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  15. Eduardo Moron & Juan F. Castro, 2003. "Dedollarizing the Peruvian Economy," Macroeconomics 0312005, EconWPA.
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