Financial Dollarization: Evaluating the Consequences

57 Pages Posted: 8 May 2006

See all articles by Eduardo Levy Levy-Yeyati

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business


The presence in residents' portfolio of foreign-currency assets and liabilities (or 'financial dollarization') has been alleged to influence monetary policy in developing economies and, especially, to cause debtors' insolvency in the aftermath exchange rate depreciations (the 'balance sheet effect'). The abundant and influential literature on these implications, however, contrasts sharply with the scarcity of empirical work aimed at confirming or refuting them. Using a new database, this paper assesses the evidence on the determinants of financial dollarization and tests whether its empirical effects on monetary and financial stability and on economic performance are consistent with theoretical predictions. It finds that financially dollarized economies display a more unstable demand for money, a greater propensity to suffer banking crises after a depreciation of the local currency, and slower and more volatile output growth, without significant gains in terms of domestic financial depth. The results indicate that active de-dollarization policies may be advisable for the many economies, including Central and Eastern European ones, where foreign-currency denominated assets and liabilities are important in residents' financial portfolios.

Suggested Citation

Levy-Yeyati, Eduardo Levy, Financial Dollarization: Evaluating the Consequences. Economic Policy, Vol. 21, No. 45, pp. 61-118, January 2006. Available at SSRN: or

Eduardo Levy Levy-Yeyati (Contact Author)

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires

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