Dollarization of the Banking System: Good or Bad?

By Gianni De Nicolo, Patrick Honohan, Alain Ize

July 1, 2003

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Format: Chicago

Gianni De Nicolo, Patrick Honohan, and Alain Ize. Dollarization of the Banking System: Good or Bad?, (USA: International Monetary Fund, 2003) accessed December 25, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper assesses the benefits and risks associated with dollarization of the banking system. We provide novel empirical evidence on the determinants of dollarization, its role in promoting financial development, and on whether dollarization is associated with financial instability. We find that: (a) the credibility of macroeconomic policy and the quality of institutions are both key determinants of cross-country variations in dollarization; (b) dollarization is likely to promote financial deepening only in a high inflation environment; and (c) financial instability is likely higher in dollarized economies. The implications of these findings for financial sector and monetary policies are discussed.

Subject: Bank deposits, Currencies, Dollarization, Exchange rates, Financial services, Foreign exchange, Inflation, Monetary policy, Money, Prices

Keywords: Asia and Pacific, Bank deposits, Caribbean, Central America, Currencies, Currency, Deposit, Deposit dollarization ratio, Dollarization, Dollarization dynamics, Dollarization phenomenon, Dollarization risk, Dollarization share, Dollarization trend, Exchange rates, Financial Deepening, Financial Instability, Inflation, Loan dollarization, Middle East, Payments dollarization, South America, Trend dollarization, Unit of account, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/146
Stock No:

WPIEA1462003
ISBN:

9781451856668
ISSN:

1018-5941

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