Financial de-dollarization in Argentina – when the wind always blows from the East

Eduardo A. Corso and Máximo Sangiácomo

Chapter 4 in Central Banking, Monetary Policy and the Political Economy of Dollarization, 2025, pp 108-143 from Edward Elgar Publishing

Abstract: Dollarization hinders financial intermediation in domestic currency, which is detrimental to economic growth and development. A large part of the literature on financial dollarization is based on portfolio theory. Dollarization of savings portfolios is the result of optimal mean-variance portfolio selection. In this chapter, we use an optimal portfolio selection approach to analyze the hysteresis of financial dollarization in Argentina. Based on the historical experience of our country, we model agents’ expectations using second-order probability distributions, which allow us to incorporate a positive bias in the subjective distribution of dollar returns. This bias arises from a subjective perception of the unsustainability of the current regime. According to the proposed analytical scheme, in contexts where households and firms face difficulties in identifying informative signals about the sustainability of the current exchange rate regime, policies aimed at promoting financial de-dollarization may lead to undesirable behavior. For example, the commonly cited mean-variance argument of increasing real exchange rate volatility relative to domestic currency volatility (inflation) could be perceived as an increase in the subjective probability of regime change, leading to portfolio rebalancing towards the foreign currency, with opposite results to those expected.

Keywords: Dollarization; Argentina; Asset substitution; Financial intermediation; Monetary Policy; Central Banking (search for similar items in EconPapers)
Date: 2025
ISBN: 9781803925325
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