- Adam Bennett, Eduardo Borensztein, and Tomás Baliño
- Published Date:
- March 1999
© 1999 International Monetary Fund
Production: IMF Graphics Section
Figures: In-Ok Yoon
Typesetting: Alicia Etchebarne-Bourdin and Julio R. Prego
Library of Congress Cataloging-in-Publication Data
Monetary policy in dollarized economies/Tomás Baliño, Adam Bennett, and Eduardo Borensztein.
p. cm.—(Occasional paper; 171)
ISBN 1–55775-757–7 (paper)
1. Monetary policy—Developing countries. 2. Foreign exchange—Developing countries. 3. Dollar, American. I. Bennett, Adam. II. Borensztein, Eduardo. III. Title. IV. Series: Occasional paper (International Monetary Fund); no. 171.
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- I Overview
- II Trends and Explanations
- III Risks and Benefits of Dollarization
- IV Monetary and Exchange Rate Policy in a Dollarized Economy
- V Operational Issues in Dollarized Economies
- VI Measures to Affect Dollarization
- VII Program Design in the Presence of Dollarization
- VIII Conclusions
- II1. Flows of U.S. Dollar Cash to Argentina
- I1. Reported Ratios of Foreign Currency Deposits (FCD) Broad Money in Countries with IMF Arrangements Since 1986
- II2. Cumulative Net Inflows of U.S. Dollar Currency, 1989–96
- V3. Payment and Regulatory Arrangements in Selected Dollarized Economies
- 4. Reserve Requirements on FCD for Selected Countries
- VII5. Recommendations for the Design of IMF Programs in the Presence of Dollarization
- 6. Some Features of Dollarized Economies
- 7. Gross Reserves in Months of Imports of Countries Reporting Information on FCD/Broad Money Ratios
- 8. Selected Indicators of Measures Influencing Dollarization
- 9. Selection of Performance Criteria in Sample Countries
- 10. Inflation in Countries Reporting Information on FCD/Broad Money Ratios
- 11. Velocity in Countries Reporting Information on FCD/Broad Money Ratios
- 12. Inflation Target Versus Outcome for the First Program Year in IMF Arrangements
- 13. Money Multiplier
- II1. Dollarization and Stabilization
- 2. FCD and Cross-Border Deposits
- V3. Bolivia: Dollarization Trends
- VI4. Chile: Indexation and Dollarization
- 5. Egypt: Asset Substitution and Real Deposit Rates
- 6. Hungary: Interest Rate Differential and Asset Substitution
- 7. Bolivia, Mexico, and Peru: Share of Deposits
- VII8. Turkey: FCD/M3 Ratio and Lira Deposit Rates
The following symbols have been used throughout this paper:
- … to indicate that data are not available;
- — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
- – between years or months (for example, 1994–95 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
- / between years (for example, 1994/95) to indicate a crop or fiscal (financial) year.
- “Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.
Currency and Monetary Instruments Reports
Dollar currency in circulation
Foreign currency deposits
Foreign currency loans
Foreign currency reserves (required for FCD)
Local currency deposits
Net domestic assets
Net foreign assets
Net international reserves
Dollarization, which is a common feature in many countries, particularly developing countries and countries in transition, has important economic implications. This Occasional Paper analyses the costs and benefits of dollarization and explores its prudential and monetary policy implications. In particular, the paper reviews dollarization trends; explores the various monetary and exchange rate policy strategies that may be pursued in the presence of dollarization; and examines the implications of dollarization for the conduct of monetary policy, the issue of prudential norms and regulations, and the design of IMF programs. The paper also considers the effectiveness and drawbacks of measures to limit dollarization.
The authors thank Guillermo Calvo and Peter Garber, who provided comments on early versions of the paper, as well as many colleagues at the IMF but especially Paul Masson, Ratna Sahay, and Tessa van der Willigen, and members of the Executive Board for valuable comments and a stimulating Board seminar discussion in January 1998.
Kiran Sastry and Manzoor Gill provided research assistance, and Magally Bernal, Usha David, Jacqueline Greene, Sylvia Palazzo, and Bogna Jezierska secretarial assistance. James McEuen of the External Relations Department edited the paper for publication and coordinated production.
The views expressed here are the sole responsibility of the authors and do not necessarily represent the opinions of the Executive Board of the IMF or other members of the IMF staff.