Dollar-denominated accounts in Latin America during the 1990s

In this paper we analyze the evolution of dollar-denominated accounts in Latin America, and how they impact the stability of the banking system and the volatility of macroeconomic aggregates. Our findings reveal that dollar deposits are strongly influenced by depreciation expectations of the local currency even in an environment of fairly low inflation. We also find that having more dollar accounts increases the probability of future crises if the economy is already in a crisis. Finally, our findings suggest that for some macroeconomic aggregates there exists a positive correlation, in the long and short run, between their volatility and the volume of dollar-denominated accounts in the banking system. The views expressed in this paper do not necessarily reflect the views of the Sociedad Hipoetcaria Federal de Mexico. The authors would like to thank Bruce Smith, Scott Freeman, Alex Minicozzi, Li Gan, Subal Kumbhakar, Gil Mehrez, Maria Soledad Martinez-Peria, Keisuke Hirano, the participants of the University of Mississippi, Barcelona, and Texas at Austin seminar series and an anonymous referee for useful comments. The authors would like to dedicate this paper to the memory of Bruce Smith.