Working Paper: NBER ID: w29034
Authors: Lawrence Christiano; Hsn Dalgic; Armen Nurbekyan
Abstract: A large literature focuses on the implications of the dollar for international risk sharing. In contrast, we find evidence that most of the risk sharing associated with the dollar is intranational rather than international. It is sometimes suggested that the insurance benefits of the dollar are undone by an increased risk of financial fragility. We display empirical evidence that this concern is over-stated. We develop a simple model formalizing our findings about the insurance role of the dollar, which is consistent with the key cross-country facts on interest rate differentials, deposit dollarization and exchange rate depreciations in recessions.
Keywords: Financial Dollarization; Risk Sharing; Emerging Market Economies
JEL Codes: F3; F4; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher deposit dollarization (F31) | greater intranational risk sharing (F65) |
| high deposit dollarization (F31) | exchange rates depreciate more during recessions (F31) |
| higher deposit dollarization (F31) | higher premium on domestic interest rates (E43) |
| dollarization (F31) | financial instability (F65) |
| depreciation on firms with balance sheet mismatches (G32) | impact on employment and investment decisions (F69) |