Dollarization and Exchange Rate Fluctuations

Although the worldwide growth in dollarization of bank deposits has recently slowed, it has already reached very high levels in dozens of countries. Building on earlier findings that allowed the main cross-country variations in the share of dollars to be explained in terms of national policies and institutions, this paper turns to analysis of short-run variations, particularly the response of dollarization to exchange rate changes, which is shown to be too small to warrant "fear of floating" by dollarized economies. But high dollarization is shown to increase the risk of depreciation and even suspension, as indicated by interest rate spreads. While specific policy is needed to deal with the risks associated with dollarization, the underlying causes of unwanted dollarization should also be tackled.

Bibliographic Details

Main Author:	Honohan, Patrick
Format:	Policy Research Working Paper biblioteca
Language:	English
Published:	World Bank, Washington, DC 2007-03
Subjects:	BANK DEPOSITS, BANK INTEREST RATES, BANKING CRISES, BANKING SYSTEM, BANKING SYSTEMS, CDS, CENTRAL BANK, CENTRAL BANK INDEPENDENCE, CENTRAL BANKS, COUNTRY VARIATION, COUNTRY VARIATIONS, CREDIT RISK, CURRENCY BOARD, CURRENCY CRISIS, CURRENCY DEPRECIATION, CURRENCY OF DENOMINATION, CURRENCY RISK, CURRENCY UNITS, DEPOSIT DOLLARIZATION, DEPOSIT INTEREST, DEPOSIT INTEREST RATES, DEPOSIT MONEY, DEPOSIT MONEY BANKS, DEPOSIT RATES, DEPRECIATION DOES, DISINFLATION, DOLLAR DEPOSITS, DOLLARIZATION RATIOS, DOMESTIC CURRENCY, EAST EUROPEAN, ELASTICITY, EURO, EXCHANGE ARRANGEMENTS, EXCHANGE CONTROLS, EXCHANGE RATE, EXCHANGE RATE CHANGES, EXCHANGE RATE CRISES, EXCHANGE RATE DEPRECIATION, EXCHANGE RATE PEG, EXCHANGE RATE POLICY, EXCHANGE RATE REGIME, EXCHANGE RATES, EXCHANGE RESTRICTIONS, FINANCIAL STABILITY, FINANCIAL SYSTEMS, FOREIGN CURRENCY, FOREIGN CURRENCY DEPOSITS, FOREIGN CURRENCY HOLDINGS, FOREIGN CURRENCY LIABILITIES, FOREIGN EXCHANGE, FOREIGN EXCHANGE RISK, FOREIGN INVESTMENTS, GDP, HIGH INFLATION, HIGH RATES, INDIRECT EFFECTS, INFLATION, INFLATION RATE, INFLATION RATES, INHERITANCE, INSTITUTIONAL DEVELOPMENT, INTEREST RATE, INTEREST RATES, INTERNATIONAL TRADE, LEBANESE POUND, LEGAL SYSTEM, LENDER OF LAST RESORT, LIQUID ASSETS, LIQUIDITY, LIQUIDITY CRISES, LOCAL BANKING SYSTEM, LOCAL BORROWERS, LOCAL CURRENCY, M2, MACROECONOMIC ENVIRONMENT, MARKET RISK, MONETARY AUTHORITIES, MONETARY EXPANSION, MONETARY POLICY, MONETARY SHOCKS, MONEY BASE, NATIONAL AUTHORITIES, NOMINAL EXCHANGE RATES, NOMINAL RATES, NORMAL VOLATILITY, OFFSHORE BANKING, OPTIMIZATION, PEGS, POLICY CREDIBILITY, POLICY OPTIONS, POLICY RESEARCH, PORTFOLIO, RISK PREMIUM, SEIGNIORAGE, SOLVENCY, STABILIZATION, STANDARD DEVIATION, SYSTEMIC RISK, TRANSITION ECONOMIES, VALUATION, YEMEN,
Online Access:	http://documents.worldbank.org/curated/en/2007/03/7459553/dollarization-exchange-rate-fluctuations http://hdl.handle.net/10986/7252
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