Contents

1 A Primer on Dollarization

1.1 Introduction

1.2 Asset vs Currency Substitution

1.3 Official and Partial Dollarization

1.4 Measuring the Degree of Partial Dollarization

1.5 Causes of Dollarization

1.6 Dollarization and Banking Dollarization

1.7 A Brief History of Dollarization Around the Globe

1.7.1 Latin America

1.7.2 Transition Economies

1.7.3 Asia

1.7.4 Sub-Saharan Africa

1.8 Exchange Rate Regimes and Dollarization

2 Pros and Cons of Dollarization

2.1 Introduction

2.2 Arguments in Favor of Dollarization

2.2.1 Inflation Reduction

2.2.2 Fiscal Discipline

2.2.3 Reduction in the Cost of Borrowing

2.2.4 Lower Transaction Costs

2.3 Benefits of Partial Dollarization

2.3.1 Encourages Saving

2.3.2 Promotes Financial Deepening

2.4 Arguments Against Dollarization

2.4.1 Costs of Dollarization under Full Dollarization

2.4.1.1 Loss of Monetary Policy

2.4.1.2 Inability to Act as a Lender of Last Resort

2.4.2 Costs of Dollarization under Partial Dollarization

2.4.2.1 Increased Foreign Exchange Rate Risk for the Banking System

2.4.2.2 Mismatch of Foreign Currency Assets and Liabilities

2.4.2.3 Increased Default Risk

2.4.2.4 Monetary Policy Challenges

3 What Causes Dollarization?

3.1 Introduction

3.2 Inflation and Dollarization

3.3 Transmission Mechanisms

3.3.1 The Trade Channel

3.3.2 The Credit Channel

3.3.3 Liability Channel

3.3.4 Evidence on Currency Substitution Theory

3.4 De-Dollarization Hysteresis

3.5 New Ideas

3.5.1 Inflation in Collective Memory

3.5.2 Minimum Variance Portfolio (MVP) Theory

3.5.2.1 The MVP Model

3.5.2.2 Evidence that Supports the MVP Theory

3.5.3 Institutions Argument

4 The Impact of Dollarization on Banking Systems

4.1 Introduction

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

4.3 Banking Risks in a Partially Dollarized Economy

4.3.1 Currency Mismatch Risk

4.3.2 From Currency Mismatch Risk to Default Risk

4.4 Empirical Evidence

5 Dollarization, Financial Deepening and Financial Inclusion

5.1 Introduction

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

5.3 Financial Inclusion

5.4 Bitcoin: The New Future Form of Dollarization?

6 Policy Interventions in Dollarized Economies

6.1 Introduction

6.2 Monetary Policy in Partially Dollarized Economies

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

6.4 Case Study: Turkey

7 Conclusions

References

Index