The Retreat of Deposit
Dollarization*

Patrick Honohan ()

International Finance, 2008, vol. 11, issue 3, pages 247-268

Abstract: After growing rapidly during the 1990s, the scale of deposit dollarization has slowed or even reversed since 2001. This paper employs an expanded cross-country data set on the share of bank deposits denominated in foreign currency. It documents the break in trend and seeks to explain this apparent reversal in this aspect of global financial integration. Valuation changes related to dollar weakness from 2002 do not seem to be the cause. But lower inflation in many countries has reduced the attractions of foreign currency as a hedge. Also, the Argentine crisis of 2001-02 may have heightened investor awareness of the risk of forced conversion of foreign currency deposits. A return to higher inflation and fading memories of forced conversions could lead to a resumption in the growth of deposit dollarization, with the banking risks that this can entail. Copyright 2008 The Author. Journal compilation 2008 Blackwell Publishing Ltd

Date: 2008

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