Financial Dedollarization: A Carrot and Stick Approach

22 Pages Posted: 16 Jun 2003

See all articles by Eduardo Levy Levy-Yeyati

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business

Date Written: May 29, 2003

Abstract

Financial dollarization (the holding by residents of foreign currency-denominated assets and liabilities) inevitably introduces a currency imbalance for the economy as a whole, amplifying the impact of real shocks. For this reason, it has been placed increasingly at the forefront of the policy debate in emerging economies. This paper argues that a successful strategy to reverse financial dollarization involves a two-way approach that includes: i) the adaptation of the prudential framework to address the externalities that tend to favor financial dollarization through the underpricing of real exchange rate risk, and ii) the development of domestic markets for local-currency substitutes to mitigate the impact of the currency switch on the domestic cost of funds. The paper discusses the main aspects associated with these two components and the menu of policy options in each case.

Keywords: Dollarization, balance sheet effects, currency crisis, emerging markets

JEL Classification: F30, F31, F33, G28

Suggested Citation

Levy-Yeyati, Eduardo Levy, Financial Dedollarization: A Carrot and Stick Approach (May 29, 2003). Available at SSRN: https://ssrn.com/abstract=412369 or http://dx.doi.org/10.2139/ssrn.412369

Eduardo Levy Levy-Yeyati (Contact Author)

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
373
Abstract Views
1,998
Rank
146,211
PlumX Metrics