Dollarization, Financial Stability Risks and Monetary Policy Implementation: Exploring the Nexus

We review the main aspects of financial dollarization in Russia during the period 2001-2020. We measure dollarization of households (HH) and non-financial corporations (NFCs) separately. An elevated exchange rate volatility was observed in 2015-2016, during the first years of the floating exchange rate regime introduced in November 2014. Notably, the increased exchange rate volatility did not translate into an increased volatility of foreign-currency denominated deposits. The dynamics of deposit dollarization is associated with the expected yield differential that includes the collective memory about the major events of currency depreciation in the past (hysteresis effect). Two deposit dollarization equilibrium levels possibly exist for an emerging market economy around 15% and 75% of deposits. When the expected yield differential is effectively zero, convergence to a higher equilibrium takes place above the 45%–50% dollarization threshold. To foster dedollarization, tighter monetary policy should be in place when the expected yield differential on domestic and foreign currency deposits is close to zero. The ruble depreciation triggered a spike in loan dollarization in Russia in both 2009 and 2015. However, the dollarization level declined rapidly after the crisis in 2008, probably signaling the lower willingness of NFCs to accept exchange rate risk. De-dollarization policies in emerging market economies are most effective when they combine floating exchange rate, inflation targeting and macroprudential policies and are supported by sustainable fiscal policy.