Exchange Rate Policy and Liability Dollarization: What Do the Data Reveal About Causality?

38 Pages Posted: 24 Apr 2007

See all articles by Pelin Berkmen

Pelin Berkmen

International Monetary Fund (IMF)

Eduardo A. Cavallo

Inter-American Development Bank (IDB) - Research Department

Date Written: February 2007

Abstract

The paper identifies the contemporaneous relationship between exchange rate policy and liability dollarization using three different definitions of dollarization. The presence of endogeneity makes the empirical identification elusive. We use identification through heteroskedasticity to solve the endogeneity problem in the present context (Rigobon, 2003). While we find that countries with high liability dollarization (external, public, or financial) tend to be more actively involved in exchange rate stabilization operations, we do not find evidence that floating, by itself, promotes de-dollarization.

Keywords: Dollarization, Exchange rate policy, External debt

Suggested Citation

Berkmen, S. Pelin and Cavallo, Eduardo A., Exchange Rate Policy and Liability Dollarization: What Do the Data Reveal About Causality? (February 2007). IMF Working Paper No. 07/33, Available at SSRN: https://ssrn.com/abstract=981640

S. Pelin Berkmen (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Eduardo A. Cavallo

Inter-American Development Bank (IDB) - Research Department ( email )

1300 New York Ave., NW
Washington, DC 20577
United States

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