Exchange Rate Policy and Liability Dollarization: What Do the Data Reveal About Causality?
15 Pages Posted: 1 Nov 2010
Abstract
The paper identifies the contemporaneous relationship between exchange rate policy and liability dollarization using three different definitions of dollarization. The presence of endogeneity makes the empirical identification elusive. We use identification through heteroskedasticity to solve the endogeneity problem in the present context (Rigobon, 2003). While we find that countries with high liability dollarization (external, public, or financial) tend to be more actively involved in exchange rate stabilization operations, we do not find evidence that floating, by itself, promotes de-dollarization.
Suggested Citation: Suggested Citation
Berkmen, S. Pelin and Cavallo, Eduardo A., Exchange Rate Policy and Liability Dollarization: What Do the Data Reveal About Causality?. Review of International Economics, Vol. 18, No. 5, pp. 781-795, November 2010, Available at SSRN: https://ssrn.com/abstract=1699934 or http://dx.doi.org/10.1111/j.1467-9396.2010.00890.x
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