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Dollarization of Financial Intermediation

Dollarization of Financial Intermediation PDF Author: Mr.Alain Ize
Publisher: International Monetary Fund
ISBN: 1451844638
Category : Business & Economics
Languages : en
Pages : 49

Book Description
This paper presents a portfolio model of financial intermediation in which currency choice is determined by hedging decisions on both sides of a bank’s balance sheet. Minimum variance portfolio (MVP) allocations are found to provide a natural benchmark to estimate the scope for dollarization of bank deposits and loans as a function of macroeconomic uncertainty. Dollarization hysteresis is shown to occur when the expected volatility of the inflation rate is high in relation to that of the real exchange rate. The evidence shows that MVP dollarization generally approximates actual dollarization closely for a broad sample of countries, and policy implications are explored.
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