Dollarization of the Banking System: Good or Bad?

44 Pages Posted: 30 Jan 2006

See all articles by Gianni De Nicolo

Gianni De Nicolo

Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)

Patrick Honohan

Trinity College Dublin - Department of Economics; Peter G. Peterson Institute for International Economics; Centre for Economic Policy Research (CEPR)

Alain Ize

World Bank

Multiple version iconThere are 2 versions of this paper

Date Written: July 2003

Abstract

This paper assesses the benefits and risks associated with dollarization of the banking system. We provide novel empirical evidence on the determinants of dollarization, its role in promoting financial development, and on whether dollarization is associated with financial instability. We find that: (a) the credibility of macroeconomic policy and the quality of institutions are both key determinants of cross-country variations in dollarization; (b) dollarization is likely to promote financial deepening only in a high inflation environment; and (c) financial instability is likely higher in dollarized economies. The implications of these findings for financial sector and monetary policies are discussed.

Keywords: Dollarization, Financial Deepening, Financial Instability

JEL Classification: E52, F36, G21

Suggested Citation

De Nicolo, Gianni and Honohan, Patrick and Ize, Alain, Dollarization of the Banking System: Good or Bad? (July 2003). IMF Working Paper, Vol. , pp. 1-44, 2003. Available at SSRN: https://ssrn.com/abstract=879222

Gianni De Nicolo (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
(410) 234-4507 (Phone)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Patrick Honohan

Trinity College Dublin - Department of Economics ( email )

Dublin 2
Ireland

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Centre for Economic Policy Research (CEPR)

33 Great Sutton St,
Clerkenwell,
London, EC1V 0DX
United Kingdom

Alain Ize

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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