Dollarization of Liabilities: Beyond the Usual Suspects

Adolfo Barajas and Armando Méndez Morales

No 2003/011, IMF Working Papers from International Monetary Fund

Abstract: Dollarization of liabilities (DL) has emerged as a key factor in explaining the vulnerability of emerging markets to financial and currency crises. "Usual suspects" of causing DL comprise "fatalistic" determinants such as a long history of unsound macroeconomic policies and development and institutional factors, aided by moral hazard opportunities related to government guarantees. This paper assesses empirically the relevance of these factors relative to alternative explanations. Based on a sample of Latin American countries, we find that ongoing central bank intervention in the foreign exchange market, relative market power of borrowers, and financial penetration are at least as important in explaining DL.

Keywords: WP; foreign currency; foreign exchange; dollarization; panel data; credit; exchange rate; lending position; market power; foreign exchange position; foreign currency deposit; foreign currency loan; effective spread; bank profit maximization behavior; foreign currency borrowing; foreign exchange intervention; foreign currency mismatch; maximization behavior; Currencies; Bank deposits; Exchange rates; Deposit insurance; Global (search for similar items in EconPapers)
Pages: 41
Date: 2003-01-01
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Citations: View citations in EconPapers (62)

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