Dollarization and Financial Development

Geoffrey Bannister, Jarkko Turunen and Malin Gardberg

No 2018/200, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; deposit dollarization; dollarization; financial development; financial deepening; financial inclusion; developing economies; credit dollarization; dollarization determinant; dollarization variable; impact of dollarization; Financial sector development; Credit; Bank deposits; Inflation; Eastern Europe (search for similar items in EconPapers)
Pages: 39
Date: 2018-09-11
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Citations: View citations in EconPapers (7)

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