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The Retreat of Deposit Dollarization

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  • Patrick Honohan

Abstract

After growing rapidly during the 1990s, the scale of deposit dollarization has slowed or even reversed since 2001. This paper employs an expanded cross‐country data set on the share of bank deposits denominated in foreign currency. It documents the break in trend and seeks to explain this apparent reversal in this aspect of global financial integration. Valuation changes related to dollar weakness from 2002 do not seem to be the cause. But lower inflation in many countries has reduced the attractions of foreign currency as a hedge. Also, the Argentine crisis of 2001–02 may have heightened investor awareness of the risk of forced conversion of foreign currency deposits. A return to higher inflation and fading memories of forced conversions could lead to a resumption in the growth of deposit dollarization, with the banking risks that this can entail.

Suggested Citation

  • Patrick Honohan, 2008. "The Retreat of Deposit Dollarization," International Finance, Wiley Blackwell, vol. 11(3), pages 247-268, December.
    • Handle: RePEc:bla:intfin:v:11:y:2008:i:3:p:247-268
    DOI: 10.1111/j.1468-2362.2008.01223.x
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    3. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
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    Cited by:

    1. OGAWA Eiji & MUTO Makoto, 2018. "What Determines Utility of International Currencies?," Discussion papers 18077, Research Institute of Economy, Trade and Industry (RIETI).
    2. Vieira, Fabrício A.C. & Holland, Márcio & Resende, Marco F., 2012. "Financial dollarization and systemic risks: New empirical evidence," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1695-1714.
    3. Adalbert Winkler, 2012. "The Financial Crisis: A Wake-up Call for Strengthening Regional Monitoring of Financial Markets and Regional Coordination of Financial Sector Policies?," Chapters, in: Masahiro Kawai & David G. Mayes & Peter Morgan (ed.), Implications of the Global Financial Crisis for Financial Reform and Regulation in Asia, chapter 7, Edward Elgar Publishing.
    4. Eiji Ogawa & Makoto Muto, 2019. "What Determines Utility of International Currencies?," JRFM, MDPI, vol. 12(1), pages 1-31, January.
    5. Marcelin, Isaac & Mathur, Ike, 2016. "Financial sector development and dollarization in emerging economies," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 20-32.

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