Financial Dollarization in Latin America

January 1, 2006

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Format: Chicago

Robert Rennhack, and Masahiro Nozaki. Financial Dollarization in Latin America, (USA: International Monetary Fund, 2006) accessed November 8, 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 tests several explanations for financial dollarization (FD), with an emphasis on Latin America. The results provide evidence that FD is a rational response to inflation uncertainty. The paper builds on previous research by finding that an exchange rate policy biased towards currency depreciation and currency mismatches tends to contribute to high FD and that FD is highly persistent. These results suggest that countries with significant FD should encourage the use of domestic currency by maintaining macroeconomic stability; allowing more exchange rate flexibility and less bias towards currency depreciation; and adapting prudential regulations to ensure that costs associated with FD are fully internalized in financial contracts. At the same time, restoring confidence in the domestic currency may take many years of sound policies.

Subject: Bank deposits, Currencies, Dollarization, Exchange rate policy, Financial services, Foreign exchange, Inflation, Monetary policy, Money, Prices

Keywords: Africa, Asia and Pacific, Bank deposits, Credit risk, Currencies, Currency, Currency depreciation, Deposit dollarization--effect, Dollarization, Dollarization ratio, Exchange rate, Exchange rate policy, Foreign currency, Foreign currency assets, Foreign currency interest, FX position, Inflation, Inflation differential, Monetary policy, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/007
Stock No:

WPIEA2006007
ISBN:

9781451862676
ISSN:

1018-5941

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