Dollarization and Financial Development

By Geoffrey J Bannister, Jarkko Turunen, Malin Gardberg

September 11, 2018

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Geoffrey J Bannister, Jarkko Turunen, and Malin Gardberg. Dollarization and Financial Development, (USA: International Monetary Fund, 2018) accessed October 6, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Despite significant strides in financial development over the past decades, financial dollarization, as reflected in elevated shares of foreign currency deposits and credit in the banking system, remains common in developing economies. We study the impact of financial dollarization, differentiating across foreign currency deposits and credit on financial depth, access and efficiency for a large sample of emerging market and developing countries over the past two decades. Panel regressions estimated using system GMM show that deposit dollarization has a negative impact on financial deepening on average. This negative impact is dampened in cases with past periods of high inflation. There is also some evidence that dollarization hampers financial efficiency. The results suggest that policy efforts to reduce dollarization can spur faster and safer financial development.

Subject: Bank deposits, Credit, Dollarization, Financial markets, Financial sector development, Financial services, Inflation, Monetary policy, Money, Prices

Keywords: Bank deposits, Credit, Credit dollarization, Deposit dollarization, Developing economies, Dollarization, Dollarization determinant, Dollarization variable, Eastern Europe, Financial deepening, Financial development, Financial inclusion, Financial sector development, Impact of dollarization, Inflation, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/200
Stock No:

WPIEA2018200
ISBN:

9781484373361
ISSN:

1018-5941

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