Financial Dollarization in Emerging Markets: Efficient Risk Sharing or Prescription for Disaster?

Lawrence Christiano, Husnu Dalgic and Armen Nurbekyan

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We present data that suggests financial dollarization is primarily a device for reallocating business cycle income risk between different people within emerging market economies, rather than across different countries. Although we identify sources of fragility in some aspects of dollarization, the common view that financial dollarization is a source of fragility is over-stated. We develop a simple model which formalizes the insurance view, which is consistent with the key crosscountry facts on interest rate differentials, deposit dollarization and exchange rate depreciations in recessions.

Pages: 125
Date: 2021-08
New Economics Papers: this item is included in nep-cwa, nep-isf and nep-mac
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