Dollarization and Financial Development

40 Pages Posted: 16 Oct 2018

See all articles by Geoffrey J. Bannister

Geoffrey J. Bannister

International Monetary Fund

Malin Gardberg

Research Institute of Industrial Economics (IFN)

Jarkko Turunen

International Monetary Fund

Date Written: September 2018

Abstract

Despite significant strides in financial development over the past decades, financial dollarization, as reflected in elevated shares of foreign currency deposits and credit in the banking system, remains common in developing economies. We study the impact of financial dollarization, differentiating across foreign currency deposits and credit on financial depth, access and efficiency for a large sample of emerging market and developing countries over the past two decades. Panel regressions estimated using system GMM show that deposit dollarization has a negative impact on financial deepening on average. This negative impact is dampened in cases with past periods of high inflation. There is also some evidence that dollarization hampers financial efficiency. The results suggest that policy efforts to reduce dollarization can spur faster and safer financial development.

Keywords: Dollarization, financial development, financial deepening, financial inclusion and developing economies, financial inclusion, developing economies, General

JEL Classification: G10, G20, O16

Suggested Citation

Bannister, Geoffrey J. and Gardberg, Malin and Turunen, Jarkko, Dollarization and Financial Development (September 2018). IMF Working Paper No. 18/200, Available at SSRN: https://ssrn.com/abstract=3267227

Geoffrey J. Bannister (Contact Author)

International Monetary Fund ( email )

700 19th St. NW
Washington, DC 20431
United States
202-623-9421 (Phone)
202-623-4237 (Fax)

Malin Gardberg

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Jarkko Turunen

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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