Contents – Understanding Dollarization

Contents

1A Primer on Dollarization

1.1Introduction

1.2Asset vs Currency Substitution

1.3Official and Partial Dollarization

1.4Measuring the Degree of Partial Dollarization

1.5Causes of Dollarization

1.6Dollarization and Banking Dollarization

1.7A Brief History of Dollarization Around the Globe

1.7.1Latin America

1.7.2Transition Economies

1.7.3Asia

1.7.4Sub-Saharan Africa

1.8Exchange Rate Regimes and Dollarization

2Pros and Cons of Dollarization

2.1Introduction

2.2Arguments in Favor of Dollarization

2.2.1Inflation Reduction

2.2.2Fiscal Discipline

2.2.3Reduction in the Cost of Borrowing

2.2.4Lower Transaction Costs

2.3Benefits of Partial Dollarization

2.3.1Encourages Saving

2.3.2Promotes Financial Deepening

2.4Arguments Against Dollarization

2.4.1Costs of Dollarization under Full Dollarization

2.4.1.1Loss of Monetary Policy

2.4.1.2Inability to Act as a Lender of Last Resort

2.4.2Costs of Dollarization under Partial Dollarization

2.4.2.1Increased Foreign Exchange Rate Risk for the Banking System

2.4.2.2Mismatch of Foreign Currency Assets and Liabilities

2.4.2.3Increased Default Risk

2.4.2.4Monetary Policy Challenges

3What Causes Dollarization?

3.1Introduction

3.2Inflation and Dollarization

3.3Transmission Mechanisms

3.3.1The Trade Channel

3.3.2The Credit Channel

3.3.3Liability Channel

3.3.4Evidence on Currency Substitution Theory

3.4De-Dollarization Hysteresis

3.5New Ideas

3.5.1Inflation in Collective Memory

3.5.2Minimum Variance Portfolio (MVP) Theory

3.5.2.1The MVP Model

3.5.2.2Evidence that Supports the MVP Theory

3.5.3Institutions Argument

4The Impact of Dollarization on Banking Systems

4.1Introduction

4.2Why Do Governments Allow Foreign Currency Accounts and Foreign Currency Lending in the Banking System?

4.3Banking Risks in a Partially Dollarized Economy

4.3.1Currency Mismatch Risk

4.3.2From Currency Mismatch Risk to Default Risk

4.4Empirical Evidence

5Dollarization, Financial Deepening and Financial Inclusion

5.1Introduction

5.2What We Know about Financial Depth and Dollarization: A Review

5.3Financial Inclusion

5.4Bitcoin: The New Future Form of Dollarization?

6Policy Interventions in Dollarized Economies

6.1Introduction

6.2Monetary Policy in Partially Dollarized Economies

6.3Regulatory Attitudes Toward Dollarization in the Aftermath of the Financial Crisis

6.4Case Study: Turkey

7Conclusions

References

Index

Footnotes