Financial dollarization |
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Authors: | Alain Ize Eduardo Levy Yeyati |
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Institution: | a International Monetary Fund, 700 19th St. N.W. 20431 Washington, DC, USA b UTDT, Minones 2159 (1428), Buenos Aires, Argentina |
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Abstract: | We present a portfolio model of financial intermediation in which currency choice is determined by hedging decisions on both sides of a bank’s balance sheet. We show that minimum variance portfolio (MVP) allocations provide a natural benchmark to estimate the scope for dollarization of assets and liabilities (financial dollarization) as a function of macroeconomic uncertainty. Within this benchmark, we find that financial dollarization displays high persistence whenever the expected volatility of the inflation rate remains high in relation to that of the real exchange rate, even after price stabilization has been achieved. The empirical evidence confirms that MVP dollarization approximates financial dollarization closely for a broad sample of countries. |
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Keywords: | Dollarization Financial intermediation Asset substitution |
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