What is Driving Financial De-Dollarization in Latin America?

24 Pages Posted: 1 Feb 2011

See all articles by Mercedes Garcia-Escribano

Mercedes Garcia-Escribano

University of Chicago - Department of Economics

Sebastiàn Sosa

International Monetary Fund (IMF) - Western Hemisphere Department

Date Written: January 2011

Abstract

In the last decade, a group of Latin American countries (Bolivia, Paraguay, Peru, and Uruguay) experienced a gradual, yet sustained decline in financial dollarization. This paper documents the stylized facts and uses a standard VAR approach to examine the drivers of both deposit and credit de-dollarization. It finds that the exchange rate appreciation has been a key factor explaining deposit de-dollarization. The introduction of prudential measures to create incentives to internalize the risks of dollarization (including an active management of reserve requirement differentials), the development of a capital market in local currency, and de-dollarization of deposits have all contributed to a decline in credit dollarization. Continuing efforts on these fronts, while maintaining macroeconomic stability and strong fundamentals, would help deepening de-dollarization.

Keywords: Banking sector, Bolivia, Capital markets, Cross country analysis, Dollarization, Exchange rate appreciation, Foreign currency deposit accounts, Latin America, Paraguay, Peru, Uruguay

Suggested Citation

Garcia-Escribano, Mercedes and Sosa, Sebastian, What is Driving Financial De-Dollarization in Latin America? (January 2011). IMF Working Paper No. 11/10, Available at SSRN: https://ssrn.com/abstract=1751420

Mercedes Garcia-Escribano (Contact Author)

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

Sebastian Sosa

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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