Exchange Rate Policy and Liability Dollarization: What do the Data Reveal about Causality? |
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| Authors: | S Pelin Berkmen Eduardo Cavallo |
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| Institution: | 1. International Monetary Fund, USA;2. Inter‐American Development Bank, USA;3. We are grateful to Roberto Rigobon, Andrés Velasco, Ricardo Hausmann, and the participants in various seminars for their insightful comments. Francisco Arizala, Patricio Valenzuela Aros, and Oscar Becerra provided excellent research assistance. All remaining errors and omissions are ours. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF, IMF policy, or the IDB. |
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| 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. |
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