What is Driving Financial De-Dollarization in Latin America?
January 1, 2011
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Summary
In the last decade, a group of Latin American countries (Bolivia, Paraguay, Peru, and Uruguay) experienced a gradual, yet sustained decline in financial dollarization. This paper documents the stylized facts and uses a standard VAR approach to examine the drivers of both deposit and credit de-dollarization. It finds that the exchange rate appreciation has been a key factor explaining deposit de-dollarization. The introduction of prudential measures to create incentives to internalize the risks of dollarization (including an active management of reserve requirement differentials), the development of a capital market in local currency, and de-dollarization of deposits have all contributed to a decline in credit dollarization. Continuing efforts on these fronts, while maintaining macroeconomic stability and strong fundamentals, would help deepening de-dollarization.
Subject: Bank deposits, Credit, De-dollarization, Dollarization, Exchange rates, Financial services, Foreign exchange, Monetary policy, Money
Keywords: Bank deposits, banking system, Bolivia, Credit, credit dollarization, de-dollarization, deposit, deposit dollarization, Dollarization, dollarization hysteresis, dollarization level, dollarization ratio, exchange rate, Exchange rates, foreign exchange, Paraguay, WP
Pages:
23
Volume:
2011
DOI:
Issue:
010
Series:
Working Paper No. 2011/010
Stock No:
WPIEA2011010
ISBN:
9781455211883
ISSN:
1018-5941
