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Deposit dollarization and the financial sector in emerging economies

  • Honohan, Patrick
  • Shi, Anging

Analyzing new data, the authors find that the general trend toward increased use of foreign-currency-denominated bank deposits in emerging markets has continued, despite declines in a few countries. Their analysis of the new data suggests that a sizable fraction (about half, on average) of funds switched to dollar deposit accounts are effectively exported through the banking system, thereby reducing the supply of credit. Moreover, increases in deposit dollarization are associated with increases in offshore deposits, which probably helps to explain the authors'finding that dollarization is associated with an increase in banking spreads. The authors'evidence supports, though only weakly, the conjecture that dollarization would tend to raise wholesale interest rates systematically through a peso premium. In contrast, greater dollarization is clearly associated with a higher pass-through coefficient from exchange rate change to consumer prices, potentially increasing nominal risk in the economy.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2748.

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Date of creation: 31 Dec 2001
Date of revision:
Handle: RePEc:wbk:wbrwps:2748
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  1. Ilan Goldfajn & Roberto Rigobon, 2000. "Hard currency and financial development," Textos para discussão 438, Department of Economics PUC-Rio (Brazil).
  2. Mishkin, Frederic S. & Savastano, Miguel A., 2001. "Monetary policy strategies for Latin America," Policy Research Working Paper Series 2685, The World Bank.
  3. John H. Cochrane, 1999. "New facts in finance," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 36-58.
  4. Pablo Emilio Guidotti & Carlos A. Rodriguez, 1991. "Dollarization in Latin America: Gresham's Law in Reverse?," IMF Working Papers 91/117, International Monetary Fund.
  5. Ilan Goldfajn & Sergio R.C. Werlang, 2000. "The pass-through from depreciation to inflation : a panel study," Textos para discussão 423, Department of Economics PUC-Rio (Brazil).
  6. Eduardo Borensztein & Andrew Berg, 2000. "The Choice of Exchange Rate Regime and Monetary Target in Highly Dollarized Economies," IMF Working Papers 00/29, International Monetary Fund.
  7. Girton, Lance & Roper, Don E, 1981. "Theory and Implications of Currency Substitution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(1), pages 12-30, February.
  8. Ronald I. McKinnon, 1996. "The Rules of the Game: International Money and Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133180, June.
  9. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
  10. Uribe, Martin, 1997. "Hysteresis in a simple model of currency substitution," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 185-202, September.
  11. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
  12. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization: The Banking Side," IMF Working Papers 00/146, International Monetary Fund.
  13. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
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