Deposit Dollarization and its Impact on Financial Deepening in the Developing World

Fordham University Department of Economics Discussion Paper No. 2010-08

30 Pages Posted: 22 Sep 2010

See all articles by Erick W. Rengifo

Erick W. Rengifo

Fordham University - Department of Economics - Center for International Policy Studies (CIPS)

Eduardo J. Court

Pontifical Catholic University of Peru - CENTRUM

Emre Ozsoz

Fordham University - Department of Economics - Center for International Policy Studies (CIPS)

Date Written: September 1, 2010

Abstract

One of the main reasons for dollarization is the erosion of money's function as a store of value as the Currency Substitution view suggests. It has not been uncommon for countries with high inflationary processes to have high dollarization ratios and banking system that faces important challenges and risks that significantly affect their ability to provide capital to the overall economy (financial intermediation). In these economies, dollarization played a dual role: in one hand, the role of a hedging instrument protecting the value of money and, in the other hand, contributing to generate the so-called currency mismatch and default risks. This paper investigates the role of dollarization on the development of financial intermediation in developing economies. Our empirical findings suggest that dollarization has a negative impact on financial deepening, except on high-inflation economies.

Keywords: Dollarization, Financial Development, Financial Deepening

JEL Classification: F31, G21, 024

Suggested Citation

Rengifo, Erick W. and Court, Eduardo J. and Ozsoz, Emre, Deposit Dollarization and its Impact on Financial Deepening in the Developing World (September 1, 2010). Fordham University Department of Economics Discussion Paper No. 2010-08, Available at SSRN: https://ssrn.com/abstract=1680889

Erick W. Rengifo

Fordham University - Department of Economics - Center for International Policy Studies (CIPS) ( email )

United States
0017188174061 (Phone)
0017188173518 (Fax)

Eduardo J. Court

Pontifical Catholic University of Peru - CENTRUM ( email )

Alomía Robles 125
Lima, Lima 33
Peru

Emre Ozsoz (Contact Author)

Fordham University - Department of Economics - Center for International Policy Studies (CIPS) ( email )

Dealy Hall 5th Floor
441 East Fordham Rd
New York, NY 10458
United States

HOME PAGE: http://www.fordham.edu/academics/office_of_research/research_centers__in/cips/

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