Default Risk and Dollarization in Mexico
William C. Gruben
affiliation not provided to SSRN
John H. Welch
JOURNAL OF MONEY, CREDIT, AND BANKING, Vol. 28, No. 3, Part 1, August 1996
Most empirical evidence of dollarization in Latin America accords with the theoretical claim that increases in expected devaluation increase dollarization. But Rogers (1992a and 1992b) finds that between 1978 and 1982, relative holdings of Mexdollars were negatively related to expected devaluation. Expected returns on Mexdollar deposits, however, depended on the solvency of the banking system. We investigate these links. We find that banking system insolvency decreases Mexdollar deposit demand and increases peso deposit demand. Once these effects are controlled for, Mexdollar demand increases with expected devaluation, even between 1978 and 1982.
JEL Classification: F31, N16, N26
Date posted: April 22, 1998