Determinants of Dollarization: The Banking Side
IMF Working Papers, August 1, 2000
Source details
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- Determinants of Dollarization: The Banking Side
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Bibliographic details
- Authors: Marco Terrones, Luis Catão
- Published: August 1, 2000
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451856637.001
Summary
- Dollarization in financial intermediation exhibits a widely diverse pattern across countries.
- Empirical work relating dollarization to macroeconomic variables has had only limited success in explaining the phenomenon.
- The paper presents a two-currency banking model showing that deposit and loan dollarization are determined by a broader set of factors.
- The direction in which dollarization tends to move with macroeconomic shocks depends on those factors as well as on initial dollarization levels.
Model and Determinants Identified
- Two-currency banking model framework used to analyze dollarization.
- Determinants include:
- Interest rates
- Exchange rate risk
- Structural factors related to costly banking
- Credit market imperfections
- Availability of tradable collateral
Key Findings and Implications
- Deposit and loan dollarization are influenced by both macroeconomic variables and structural features of the banking and credit market.
- Exchange rate risk and interest rate differentials play central roles in currency composition of deposits and loans.
- Structural constraints—such as costly banking, imperfect credit markets, and limited tradable collateral—alter how dollarization responds to macroeconomic shocks.
- Initial levels of dollarization matter for the direction of change after shocks.
Content in this bundle
- Determinants of Dollarization: The Banking Side-WP/00/146