International Finance Discussion Papers (IFDP)
September 2002 (Revised April 2005)
Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Bank Currency Mismatches?
Carlos O. Arteta
Abstract:
The dollarization of bank deposits and credit is widespread in developing countries, resulting in varying degrees of currency mismatches in domestic financial intermediation, which in turn might accentuate bank balance sheet fragility. It is widely argued that flexible exchange rate regimes encourage banks to match dollar-denominated liabilities with a corresponding amount of dollar-denominated assets, ameliorating currency mismatches. Does the behavior of dollar deposits and credit in financially dollarized economies support that presumption? A new database on deposit and credit dollarization in developing and transition countries is assembled and used to address this question. Empirical results suggest that, if anything, floating regimes seem to exacerbate, rather than ameliorate, currency mismatches in domestic financial intermediation, as those regimes seem to encourage deposit dollarization more strongly than they encourage matching via credit dollarization.
Original version (PDF)Keywords: Dollarization, exchange rate, regimes, currency mismatches, banks
PDF: Full Paper
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