Working Paper: CEPR ID: DP6205
Authors: Patrick Honohan
Abstract: Although the worldwide growth in dollarization of bank deposits has recently slowed, it has already reached very high levels in dozens of countries. Building on earlier findings that allowed the main cross-country variations in the share of dollars to be explained in terms of national policies and institutions, this paper turns to analysis of short-run variations, particularly the response of dollarization to exchange rate changes, which is shown to be too small to warrant ?fear of floating? by dollarized economies. But high dollarization is shown to increase the risk of depreciation and even suspension, as indicated by interest rate spreads. While specific policy is needed to deal with the risks associated with dollarization, the underlying causes of unwanted dollarization should also be tackled.
Keywords: banking; developing countries; dollarization; exchange rates
JEL Codes: E44; F36; O24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate depreciation (F31) | dollarization shares (F31) |
| expectations about future currency movements (F31) | dollarization behavior (F31) |
| high levels of dollarization (F31) | risks of currency depreciation (F31) |
| high levels of dollarization (F31) | rising interest rate spreads (E43) |
| dollarization shares (F31) | destabilization of exchange rate regimes (F33) |