IMF Working Papers

Exchange Rate Policy and Liability Dollarization: An Empirical Study

By Pelin Berkmen, Eduardo A. Cavallo

February 1, 2007

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Format: Chicago

Pelin Berkmen, and Eduardo A. Cavallo "Exchange Rate Policy and Liability Dollarization: An Empirical Study", IMF Working Papers 2007, 033 (2007), accessed June 17, 2025, https://doi.org/10.5089/9781451865974.001

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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

The paper identifies the contemporaneous relationship between exchange rate policy and liability dollarization using three different definitions of dollarization. The presence of endogeneity makes the empirical identification elusive. We use identification through heteroskedasticity to solve the endogeneity problem in the present context (Rigobon, 2003). While we find that countries with high liability dollarization (external, public, or financial) tend to be more actively involved in exchange rate stabilization operations, we do not find evidence that floating, by itself, promotes de-dollarization.

Subject: Currencies, Dollarization, Exchange rate arrangements, Exchange rate policy, Exchange rates

Keywords: Central bank, Foreign currency, Liability dollarization, Monetary policy, Standard deviation, WP

Publication Details

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