Dollarization of the Banking System: Good or Bad?

Author/Editor:

Gianni De Nicolo ; Patrick Honohan ; Alain Ize

Publication Date:

July 1, 2003

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper assesses the benefits and risks associated with dollarization of the banking system. We provide novel empirical evidence on the determinants of dollarization, its role in promoting financial development, and on whether dollarization is associated with financial instability. We find that: (a) the credibility of macroeconomic policy and the quality of institutions are both key determinants of cross-country variations in dollarization; (b) dollarization is likely to promote financial deepening only in a high inflation environment; and (c) financial instability is likely higher in dollarized economies. The implications of these findings for financial sector and monetary policies are discussed.

Series:

Working Paper No. 2003/146

Subject:

Bank deposits Currencies Dollarization Exchange rates Financial services Foreign exchange Inflation Monetary policy Money Prices

English

Publication Date:

July 1, 2003

ISBN/ISSN:

9781451856668/1018-5941

Stock No:

WPIEA1462003

Pages:

43

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