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Financial Dollarization and Dedollarization

Author

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  • Eduardo Fernández-Arias

Abstract

Financial dollarization is a key factor behind systemic financial fragility in Latin America. The experience shows that dedollarization can be achieved but can just as easily be missed, and worse: blunt dedollarization measures that repress dollarization may easily fail to solve fragility and, instead, foster risky short-term debt or provoke massive financial disintermediation and crisis. This paper analyzes the sources of liability dollarization in a portfolio framework and identifies the failures leading to excessive dollarization that merit policy intervention as well as the reasons why dedollarization policy often goes awry. It then derives an analytically sound, multipronged domestic dedollarization program that takes into account the risks of misdiagnosis and the experiences, both successful and failed. This program centers around the development of good local currency substitutes for dollar debt, such as CPI-indexed debt, rather than the repression of dollar debt.

Suggested Citation

  • Eduardo Fernández-Arias, 2006. "Financial Dollarization and Dedollarization," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 37-100, January.
    • Handle: RePEc:col:000425:008653
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    Citations

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    Cited by:

    1. Bitar, Joseph, 2021. "Foreign Currency Intermediation: Systemic Risk and Macroprudential Regulation," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 2(2).
    2. Nannette Lindenberg & Frank Westermann, 2012. "How strong is the case for dollarization in Central America? An empirical analysis of business cycles, credit market imperfections and the exchange rate," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 17(2), pages 147-166, April.
    3. Jeta Menkulasi & Lodewyk Erasmus & Jules Leichter, 2009. "Dedollarization in Liberia-Lessons From Cross-Country Experience," IMF Working Papers 2009/037, International Monetary Fund.

    More about this item

    Keywords

    dollarization; portfolio framework; policy intervention;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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