Determinants of Dollarization: The Banking Side

August 1, 2000

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Marco Terrones, and Luis Catão. Determinants of Dollarization: The Banking Side, (USA: International Monetary Fund, 2000) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Dollarization in financial intermediation has exhibited a widely diverse pattern across countries. Empirical work relating it to macroeconomic variables has had only limited success in explaining the phenomenon. This paper presents a two-currency banking model to show that deposit and loan dollarization are determined by a broader set of factors. These include interest rates and exchange rate risk, as well as structural factors related to costly banking, credit market imperfections, and availability of tradable collateral. The direction in which dollarization tends to move with macroeconomic shocks is shown to depend on those factors as well as on initial dollarization levels.

Subject: Bank credit, Banking, Currencies, Dollarization, Exchange rate risk, Financial institutions, Financial regulation and supervision, Loans, Monetary policy, Money

Keywords: Asia and Pacific, Bank credit, Contract bank lending, Currencies, Deposit dollarization, Devaluation risk, Dollarization, Eastern Europe, Emerging Markets, Exchange rate risk, Foreign currency, Loan collateralization, Loan default, Loan dollarization, Loan market, Loan portfolio, Loans, Money and Banking, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2000/146
Stock No:

WPIEA1462000
ISBN:

9781451856637
ISSN:

1018-5941

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