Dollarization of Financial Intermediation: Causes and Policy Implications

March 1, 1998

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Eduardo Levy Yeyati, and Alain Ize. Dollarization of Financial Intermediation: Causes and Policy Implications, (USA: International Monetary Fund, 1998) accessed September 18, 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

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.

Subject: Currencies, Dollarization, Financial institutions, Foreign exchange, Inflation, Loans, Monetary policy, Money, Prices, Real exchange rates

Keywords: Asset substitution, Country risk, Currencies, Deposit dollarization, Dollarization, Dollarization hysteresis, Dollarization ratio, Dollarization trend, Exchange rate, Financial intermediation, Foreign currency, Inflation, Interest rate, Loan dollarization, Loans, MVP dollarization, Real exchange rates, Underlying dollarization, WP

Publication Details

Pages:

48
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1998/028
Stock No:

WPIEA0281998
ISBN:

9781451844634
ISSN:

1018-5941

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