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The Impact of Deposit Dollarization on Credit Dollarization: Evidence of Natural Hedging and Excessive Risk-Taking Channels

Author

Listed:
  • Jorge Pozo

    (Banco Central de Reserva del Perú.)

Abstract

This article studies the impact of deposit dollarization on credit dollarization through the natural hedging and the excessive risk-taking hannels. We develop a theoretical model that helps us to describe both channels and how these determine the direction in which deposit dollarization might affect credit dollarization. The model shows that through the natural hedging channel, deposit dollarization positively affects credit dollarization, while through the excessive bank risk-taking channel, deposit dollarization negatively affects credit dollarization. Using regional data of credits and deposits in Peru, we find evidence of these two channels, with the natural hedging channel being the dominant one. In addition, we reveal that les credit market competition and high FX uncertainty amplify the role of the excessive bank risk-taking channel.

Suggested Citation

  • Jorge Pozo, 2025. "The Impact of Deposit Dollarization on Credit Dollarization: Evidence of Natural Hedging and Excessive Risk-Taking Channels," Working Papers 2025-013, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2025-013
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    Keywords

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    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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