{
  "title": "Dollarization of Financial Intermediation: Causes and Policy Implications",
  "publication": "IMF Working Papers, March 1, 1998",
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  "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.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- 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.\n- Finds that Minimum Variance Portfolio (MVP) allocations provide a natural benchmark to estimate the scope for dollarization of bank deposits and loans as a function of macroeconomic uncertainty.\n- Shows that dollarization hysteresis occurs when the expected volatility of the inflation rate is high in relation to that of the real exchange rate.\n- Reports evidence that MVP dollarization generally approximates actual dollarization closely for a broad sample of countries.\n- Policy implications are explored."
    },
    {
      "heading": "Model and Mechanism",
      "content": "- Currency choice is modeled through hedging decisions on both assets and liabilities of banks.\n- Minimum Variance Portfolio (MVP) allocations are used as the benchmark allocation rule.\n- Dollarization hysteresis mechanism:\n  - Occurs when expected volatility of the inflation rate is high relative to expected volatility of the real exchange rate."
    },
    {
      "heading": "Empirical Findings",
      "content": "- MVP dollarization generally approximates actual dollarization closely across a broad sample of countries.\n- The scope for dollarization of bank deposits and loans is estimated as a function of macroeconomic uncertainty using MVP allocations."
    },
    {
      "heading": "Policy Implications (as explored in the paper)",
      "content": "- Implications relate to how macroeconomic volatility (particularly inflation volatility versus real exchange rate volatility) shapes dollarization and its persistence.\n- Policy responses should account for the hedging-driven currency choices of banks on both sides of the balance sheet and the potential for hysteresis in dollarization under high relative inflation volatility.\n\n---\n\n Content in this bundle\n\n- Dollarization of Financial Intermediation: Causes and Policy Implications -WP/98/28\n  - Dollarization of Financial Intermediation: Causes and Policy Implications -WP/98/28 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Dollarization of Financial Intermediation: Causes and Policy Implications -WP/98/28 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/dollarization-of-financial-intermediation-causes-and-policy-implications-2523"
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    "Authors: Eduardo Levy Yeyati, Alain Ize",
    "Published: March 1, 1998",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451844634.001",
    "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.",
    "Finds that Minimum Variance Portfolio (MVP) allocations provide a natural benchmark to estimate the scope for dollarization of bank deposits and loans as a function of macroeconomic uncertainty.",
    "Shows that dollarization hysteresis occurs when the expected volatility of the inflation rate is high in relation to that of the real exchange rate.",
    "Reports evidence that MVP dollarization generally approximates actual dollarization closely for a broad sample of countries.",
    "Policy implications are explored.",
    "Currency choice is modeled through hedging decisions on both assets and liabilities of banks.",
    "Minimum Variance Portfolio (MVP) allocations are used as the benchmark allocation rule.",
    "Dollarization hysteresis mechanism:",
    "MVP dollarization generally approximates actual dollarization closely across a broad sample of countries.",
    "The scope for dollarization of bank deposits and loans is estimated as a function of macroeconomic uncertainty using MVP allocations.",
    "Implications relate to how macroeconomic volatility (particularly inflation volatility versus real exchange rate volatility) shapes dollarization and its persistence.",
    "Policy responses should account for the hedging-driven currency choices of banks on both sides of the balance sheet and the potential for hysteresis in dollarization under high relative inflation volatility.",
    "**Dollarization of Financial Intermediation: Causes and Policy Implications -WP/98/28**"
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