Financial Dollarization of Households and Firms: Does It Differ?

IMF Working Papers, January 22, 2019

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Financial Dollarization of Households and Firms: Does It Differ?

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Bibliographic details

• Authors: Juan S Corrales, Patrick A. Imam
• Published: January 22, 2019
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484393192.001

Overview

• Title: Financial Dollarization of Households and Firms: Does It Differ?
• Authors: Juan S Corrales, Patrick A. Imam
• Date: January 22, 2019
• Paper series: Working Paper No. 2019/019
• Issue: 019
• Pages: 45

Data and Methodology

• Data source: A newly compiled and extended database from International Financial Statistics.
• Empirical approach: Different panel-regression techniques and a variance decomposition model.
• Scope: Evolution of households’ and firms’ dollarization over the past decade; differences between high and low-income countries.

Key Findings

• General explanatory power
  • Households’ and firms’ dollarization in loans and deposits are weakly explained by the currency substitution model.
  • Exception: In low income countries, inflation plays a significant role in explaining dollarization.
• Market development factors
  • Market development variables (financial deepening, access to external debt and FX finance, and other market considerations) are key to explaining the dynamics of deposits and loans dollarization regardless of the level of income.
  • These market development factors can account for a significant fraction of observed dollarization.
• Unexplained component
  • Variance decomposition results show that a non-negligible portion of dollarization remains unexplained by the models used.
  • This implies that key determinants of household and firm dollarization are not fully captured by traditional macroeconomic explanatory variables.

Policy-Relevant Implications

• Relying solely on the currency substitution model may be insufficient for policymaking on dollarization, especially outside low income countries.
• Strengthening market development (financial deepening; improving access to external debt and FX finance; addressing other market considerations) should be central to policies aimed at influencing deposits and loans dollarization.
• Additional research and data collection are needed to identify the determinants that remain unexplained by traditional macroeconomic variables.

Subjects and Keywords (as listed)

• Subjects: Currencies, Dollarization, Financial institutions, Foreign exchange, Loans, Monetary policy, Money, National accounts, Personal income
• Keywords: credit dollarization, Currencies, deposit dollarization, Dollarization, dollarization behavior, dollarization data, dollarization of firm, dollarization of household, Eastern Europe, Financial deepening, Firm, firms dollarization, firms' loan, foreign currency, Funis deposits dollarization, FX loan, Household, household dollarization, interest rate, loan dollarization, Loans, Personal income, private sector, WP

Content in this bundle

• Financial Dollarization of Households and Firms: Does It Differ?, WP/19/19, January 2019
  • Financial Dollarization of Households and Firms: Does It Differ?, WP/19/19, January 2019 (Markdown version)
  • Financial Dollarization of Households and Firms: Does It Differ?, WP/19/19, January 2019 (PDF)