Dollarization of Liabilities: Beyond the Usual Suspects
42 Pages Posted: 26 Apr 2003
Date Written: January 2003
Dollarization of liabilities (DL) has emerged as a key factor in explaining the vulnerability of emerging markets to financial and currency crises. The "usual suspects" of causing DL include fatalistic determinants such as a long history of unsound macroeconomic policies, financial development and institutional factors, aided by moral hazard opportunities arising from the existence of government guarantees. This paper assesses empirically the relevance of these factors, as well as that of alternative explanations for DL. Based on a sample of Latin American countries, we find that ongoing central bank intervention in the foreign exchange market, relative market power of borrowers, and financial penetration are at least as important as the usual suspects in explaining DL.
Keywords: Dollarization, bank credit, exchange rates, panel data
JEL Classification: C33, E44, G21, F31, F34
Suggested Citation: Suggested Citation