Dollarization of Financial Intermediation: Causes and Policy Implications
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Summary:
This paper presents a portfolio model of financial intermediation in which currency choice is determined by hedging decisions on both sides of a bank’s balance sheet. Minimum variance portfolio (MVP) allocations are found to provide a natural benchmark to estimate the scope for dollarization of bank deposits and loans as a function of macroeconomic uncertainty. Dollarization hysteresis is shown to occur when the expected volatility of the inflation rate is high in relation to that of the real exchange rate. The evidence shows that MVP dollarization generally approximates actual dollarization closely for a broad sample of countries, and policy implications are explored.
Series:
Working Paper No. 1998/028
Subject:
Currencies Dollarization Financial institutions Foreign exchange Inflation Loans Monetary policy Money Prices Real exchange rates
English
Publication Date:
March 1, 1998
ISBN/ISSN:
9781451844634/1018-5941
Stock No:
WPIEA0281998
Pages:
48
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