are signs of financial deepening emerging. In other words, the macroeconomic foundations are strengthening, and policymakers have gained in credibility, reducing the attractiveness of dollarization in many cases (see Corrales et al. , 2015).
However, while the literature has focused on explaining the causes of overall dollarization, it has paid scant attention to the differences in the determinants between household and firmdollarization. Does household dollarization differ from firmdollarization? Do households and firms hold deposits and assets differently in
Using a newly complied and extended database from International Financial Statistics, and applying different panel-regression techniques, this paper documents the evolution of households’ and firms’ dollarization over the past decade. We assess the macroeconomic determinants of dollarization for households and firms and explore differences between high and low-income countries. We find that households’ and firms’ dollarization in loans and deposits are weakly explained by the currency substitution model, except in low income countries, where inflation plays a significant role. Instead, market development variables such as financial deepening, access to external debt and FX finance as well as other market considerations are key to explain the dynamics of deposits and loans dollarization, regardless of the level of income.These factors can account for a significant fraction of the dollarization, but using a variance decomposition model, there is evidence that a non-negligible portion has yet to be explained. This suggests that there are key determinants for household and firm dollarization that are not fully captured by traditional macroeconomic explanatory variables.
Front Matter Page African Department
Financial Dollarization of Households and Firms: Does It Differ?
Prepared by Juan-Sebastian Corrales and Patrick A. Imam
Authorized for distribution by Gene Leon
II. Literature Review
III. Dynamics of Households and Firms’ Dollarization
IV. Determinants of Households and Firms’ Dollarization
V. Contributions to dollarization
VI. Conclusions and policy implications
1. Private Sector Financial Dollarization
2. Correlation between Loans and
Ms. Anne Marie Gulde, Mr. David S. Hoelscher, Mr. Alain Ize, Mr. Dewitt D Marston, and Mr. Gianni De Nicolo
may be more exposed to credit cycles and liquidity risk ( Table 3 ). Based on estimates of non-performing loans (NPLs) or a composite systemic risk measure, the Z-index, which measures the probability of insolvency of a firm, dollarized economies also may be more exposed to solvency risk ( Box 3 and Table 4 ).
Deposit Volatility and Dollarization
Adjusted R 2
Number of Countries
D. Additional Statistical Checks
VI. Alternative Explanations
A. Changes in Regulations to Banks’ Foreign Currency Lending
B. Differential Access to Credit and Ability to Expand Production During Crisis
VII. A Closer Look at the Data: Exploiting Changes in Entire Distribution of Firms’ Dollar Debt Ratios
A. Conditional Quantile Estimates: Basic Framework
1. Number of Observations Used in Empirical Analyses
2. Descriptive Statutes for Full Sample
3. Exchange Rate Regimes and Measures
in the local currency. This extension is important, considering that a large share of sample firms comes from export-oriented Asian economies. Meanwhile, the foreign currency in this model effectively plays the dual role of an invoicing currency of international trade and the primary unit of account for international debt contracts. Given these features, this paper focuses on debt dollarization in US dollars.
The empirical exercise confirms two main implications of the model. First, firms’ dollar debt share is found to be negatively associated with exchange rate
International Monetary Fund. Western Hemisphere Dept.
back to 2 percent over the medium term, policy rates should rise, depending on incoming information. Weighing these factors carefully, the Federal Reserve is appropriately planning to raise its policy rates, with lift-off expected later this year, only gradually.
Risks to the U.S. Recovery
Although developments point to a robust U.S. recovery, there are several downside risks:
A firmerdollar—particularly, a sudden and sharp appreciation—could suppress export growth in manufacturing more than anticipated, especially if overseas growth disappoints. Model
Using a unique dataset with information on the currency composition of firms' assets and liabilities in six Latin-American countries, I investigate how the choice of exchange rate regime affects firms' foreign currency borrowing decisions and the associated currency mismatches in their balance sheets. I find that after countries switch from pegged to floating exchange rate regimes, firms reduce their levels of foreign currency exposures, in two ways. First, they reduce the share of debt contracted in foreign currency. Second, firms match more systematically their foreign currency liabilities with assets denominated in foreign currency and export revenues--effectively reducing their vulnerability to exchange rate shocks. More broadly, the study provides novel evidence on the impact of exchange rate regimes on the level of un-hedged foreign currency debt in the corporate sector and thus on aggregate financial stability.
reduce their unhedged foreign currency exposures by using more systematically their assets in foreign currency to offset their dollar debt risk.
The effects of exchange rate regimes on firms’ foreign currency hedging—if present—should be particularly manifest in firms that are significantly exposed to currency risk. To test this hypothesis, I use a censored quantile regression approach to look at the effects of the exchange regime at various points of the cross-sectional distribution of firms’ dollar debt ratios. My third finding is flexible exchange rate regimes
This paper examines how financial development influences the debt dollarization of nonfinancial firms in a sample of emerging market economies (EMEs). The macroeconomic channels are identified from an optimal portfolio allocation model and assessed empirically using the accounting information of nonfinancial firms from 21 EMEs during 2009–2017. The results show that financial development, measured by the private credit-to-GDP ratio, mainly reduces the influence of exchange rate volatility in determining a firm's debt currency composition, among other channels. Furthermore, the effect of exchange rate volatility becomes statistically insignificant beyond an estimated threshold credit-to-GDP ratio of 100 percent.