What is Driving Financial De-dollarization inLatin America?
Mercedes García-Escribano and Sebastián Sosa
WP/11/10
© 2010 International Monetary Fund WP/
IMF Working Paper
Western Hemisphere Department
What is Driving Financial De-dollarization in Latin America?Prepared by Mercedes García-Escribano and Sebastián Sosa
1
Authorized for distribution by David VegaraJanuary 2011
Abstract
In the last decade, a group of Latin American countries (Bolivia, Paraguay, Peru, andUruguay) experienced a gradual, yet sustained decline in financial dollarization. This paper documents the stylized facts and uses a standard VAR approach to examine the drivers of both deposit and credit de-dollarization. It finds that the exchange rate appreciation has beena key factor explaining deposit de-dollarization. The introduction of prudential measures tocreate incentives to internalize the risks of dollarization (including an active management of reserve requirement differentials), the development of a capital market in local currency, andde-dollarization of deposits have all contributed to a decline in credit dollarization.Continuing efforts on these fronts, while maintaining macroeconomic stability and strongfundamentals, would help deepening de-dollarization.JEL Classification Numbers:E50; G20; G21; G28Keywords: de-dollarization; banking system.Author’s E-Mail Address: mgarciaescribano@imf.org; ssosa@imf.org
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Mercedes García-Escribano and Sebastián Sosa are economists at the Western Hemisphere Department,International Monetary Fund. The authors would like to thank Miguel Savastano, Rodrigo Valdés,Martín Kaufman, Robert Rennhack, Gilbert Terrier, David Vegara, Gastón Gelos, and participants at the CentralBank of Peru and WHD-IMF seminars for their feedback and extensive discussions.
This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarilyrepresent those of the IMF or IMF policy. Working Papers describe research in progress by theauthor(s) and are published to elicit comments and to further debate.
2Contents PageI. Introduction ............................................................................................................................3
II. De-dollarization Trend—Stylized Facts ................................................................................5
III. Explaining De-dollarization: Empirical Approach ..............................................................8
A. Methodology .............................................................................................................8
B. Macro variables–the role of exchange rate trend and volatility ................................9
C. The introduction of prudential measures .................................................................11
D. Capital market development in local currency .......................................................12
IV. Empirical Results ...............................................................................................................13
V. Concluding Remarks ...........................................................................................................21
Tables1.
De-dollarization 200110 ................................................................................................6
2.
Peru: Decomposition of De-dollarization Into a Within and Between Components .....7
3.
Definition of Variables in the VAR ...............................................................................8
4. Size of the Shock .........................................................................................................17
5.
Variance Decomposition of Changes in Credit Dollarization .....................................19
6.
Variance Decomposition of Changes in Deposit Dollarization ...................................19
7.
What Drives De-dollarization? ....................................................................................20
Figures1.
Evolution of Dollarization in Selected Countries of Latin America ..............................3
2.
Evolution of Financial Dollarization .............................................................................5
3.
Evolution of Deposit Dollarization by Maturity ............................................................7
4.
Evolution of Credit Dollarization by Type of Credit .....................................................7
5.
Evolution of Inflation .....................................................................................................9
6.
Changes in the Exchange Rate and Dollarization Ratios, 2003–2010 .........................10
7.
Evolution of the Nominal Exchange Rate and Dollarization .......................................10
8.
Exchange Rate Volatility and Changes in Dollarization .............................................11
9.
Development of Debt Market in Domestic Currency and Dollarization .....................13
10.
Response of Dollarization to a Shock to Differential Reserve Requirement Ratios ...14
11.
Response of Dollarization to the Introduction of Prudential Measures .......................15
12.
Response of Dollarization to the Issuance of Local Currency Long-term Bonds .......15
13.
Response of Dollarization to an Exchange Rate Shock ...............................................16
14.
Response of Dollarization to an Exchange Rate Volatility Shock ..............................17
15.
Response of Credit Dollarization to a Shock to Deposit Dollarization .......................18
References ................................................................................................................................22
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