Revisiting the Concept of Dollarization: The Global Financial Crisis and Dollarization in Low-Income Countries
IMF Working Papers, January 22, 2015
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Bibliographic details
- Authors: Nkunde Mwase, Francis Y Kumah
- Published: January 22, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484366912.001
Overview
- Paper proposes a new approach to measuring dollarization that removes exchange rate effects affecting nominal deposit dollarization ratios.
- Focus period for crisis analysis: 2006–09.
- Key contrast: while dollarization in nominal terms surged during the recent global financial crisis, there was a downward trend in real terms.
Measurement approach
- Standard literature measures deposit dollarization in nominal terms as the ratio of foreign currency deposits to broad money.
- New measure introduced: adjusts dollarization metrics to remove exchange rate movements so that foreign-currency-denominated demand by private agents is tracked in real foreign-currency terms rather than being affected mechanically by exchange rate fluctuations.
- Demonstrated result: beyond the variance of inflation and depreciation, the level of inflation and size of depreciation also matter for dollarization.
Empirical findings
- Nominal dollarization:
- Surged during the recent global financial crisis.
- Real (exchange‑rate adjusted) dollarization:
- Displayed a downward trend over the same period.
- Drivers and moderating factors:
- Exchange rate appreciation moderates dollarization.
- Reductions in sovereign risk moderate dollarization.
- Global volatility’s estimated effect on dollarization has low statistical significance in many specifications.
- Impulse-response analysis:
- Estimated impulse-response functions point to a large but short-lived positive impact of global volatility on dollarization, consistent with heightened concerns about spillover effects of global uncertainty on the domestic economy.
Econometric analysis
- Methods:
- Employs a set of econometric estimators, including GMM and impulse response techniques, to investigate whether “real” dollarization during 2006–09 was associated with the crisis.
- Tested roles of:
- Initial macroeconomic conditions.
- Quality of institutions.
- Risk aversion.
- Prudential measures.
- Statistical significance:
- Effects of global volatility are generally of low statistical significance, possibly because global shocks tend to preserve relative attractiveness of foreign assets.
Key statistics and publication metadata
- Analysis period highlighted: 2006–09.
- Pages: 31
- Volume: 2015
- Issue: 012
- Series: Working Paper No. 2015/012
- DOI: https://doi.org/10.5089/9781484366912.001
- ISBN: 9781484366912
- Authors: Nkunde Mwase, Francis Y Kumah
- Publication date shown: January 22, 2015
IMF Working Paper — "Revisiting the Concept of Dollarization: The Global Financial Crisis and Dollarization in Low-Income Countries" by Nkunde Mwase and Francis Y Kumah.