This Selected Issues paper presents a comparative analysis of the macroeconomic adjustment in Chile, Colombia, and Peru to commodity terms-of-trade shocks. The study is done in two steps: (1) an analysis of the impulse responses of key macroeconomic variables to terms-of-trade shocks and (2) an event study of the adjustment to the recent decline in commodity prices. The experiences of these countries highlight the importance of flexible exchange rates to help with the adjustment to lower commodity prices, and staying vigilant in addressing depreciation pressures on inflation through tightening monetary policies. On the fiscal front, evidence shows that greater fiscal space, like that of Chile and Peru, gives more room for accommodating terms-of-trade shocks.

Abstract

This Selected Issues paper presents a comparative analysis of the macroeconomic adjustment in Chile, Colombia, and Peru to commodity terms-of-trade shocks. The study is done in two steps: (1) an analysis of the impulse responses of key macroeconomic variables to terms-of-trade shocks and (2) an event study of the adjustment to the recent decline in commodity prices. The experiences of these countries highlight the importance of flexible exchange rates to help with the adjustment to lower commodity prices, and staying vigilant in addressing depreciation pressures on inflation through tightening monetary policies. On the fiscal front, evidence shows that greater fiscal space, like that of Chile and Peru, gives more room for accommodating terms-of-trade shocks.

The Missing Link? Exchange Rate Volatility and De-Dollarization in Peru1

High levels of dollarization may render corporations and individuals very exposed to exchange rate volatility. But, higher exchange rate volatility may reduce incentives of holding liabilities or assets in foreign currency, thus reducing overall dollarization in an economy and increasing the pass-through of monetary policy decisions to inflation and economic activity. This chapter studies the impact that higher volatility in the nominal bilateral exchange rate with respect to the U.S. dollar has on the speed of de-dollarization across a sample of 33 emerging market economies, spanning the period 1997-2015. It finds that, indeed, higher exchange rate volatility, after controlling for global and country-specific factors, speeds up de-dollarization. More exchange rate flexibility may be the last needed step to reduce dollarization in Peru to very low levels.

A. Motivation

1. The share of dollar lending and dollar deposits in the Peruvian banking system has declined significantly over time. Hyperinflation in the early 1990s gave rise to very significant dollarization, which reached over 80 percent of all bank loans and deposits. A series of reforms, including the adoption of inflation targeting in 2002, and significant macroeconomic adjustment resulted in very low and stable inflation. This, together with sound macroeconomic policies, helped to bring dollarization down gradually. 2 Peru’s impressive de-dollarization also stands out when compared with experiences of de-dollarization in other emerging markets.

A03ufig01

Loans and Deposits in FX

(Percent of Total)

Citation: IMF Staff Country Reports 2016, 235; 10.5089/9781475582741.002.A003

Sources: BCRP and Fund staff calculations.
A03ufig02

Loan Dollarization

(% of total, at constant exch. rate)

Citation: IMF Staff Country Reports 2016, 235; 10.5089/9781475582741.002.A003

Sources: IFS statistics, country websites, and Fund staff calculations. 1/ Data points could be slightly different depending on data availability.

2. But, dollarization still hampers monetary policy transmission in Peru. When inflation is high or very uncertain, risks to creditors’ claims rise, thereby triggering banks’ unwillingness to extend sufficient credit. Risks to savers also rises if the local currency is not considered very reliable to store value. In this situation, lending in foreign currency (FX) could protect the economy from a sharp credit crunch while at the same time protecting consumers’ savings. However, in a low inflation environment such as in Peru, dollarization may have more mixed effects on the economy. It complicates the transmission of monetary policy rates to market interest rates and may increase the pass-through of exchange rates to inflation. It also aggravates concerns about financial stability as, for instance, exchange rate depreciation may lead to losses by un-hedged borrowers. Dollarization (of deposits) also complicates the central bank’s lender-of-last-resort role as the central bank typically has a more limited ability to provide funding in FX in case of FX liquidity pressures.3

3. To further speed up de-dollarization, the central bank recently implemented a number of measures. In particular, in early 2015, the central bank established medium-term deadlines by which commercial banks were to reduce foreign exchange lending, including on particular categories such as mortgage loans and loans for car purchases. Failure to meet these deadlines results in higher reserve requirements on ‘excess’ FX lending operations. This program significantly accelerated loan de-dollarization;4 in 2015, FX lending as a share of total lending fell by some 10 percentage points to below 30 percent, the strongest ever decline in one year.

A03ufig03

Change in Loan Dollarization in Peru

(PPT Change, at constant exch. rate)

Citation: IMF Staff Country Reports 2016, 235; 10.5089/9781475582741.002.A003

Sources: BCRP and Fund staff calculations
A03ufig04

Selected Latin American Currencies

(LC/US$; Index Feb 2, 2015 =100)

Citation: IMF Staff Country Reports 2016, 235; 10.5089/9781475582741.002.A003

Sources: Bloomberg, and Fund staff calculations.

4. This chapter looks at whether higher exchange rate volatility can contribute to ongoing de-dollarization. Specifically, this chapter studies the impact that higher daily volatility in the nominal bilateral exchange rate with respect to the U.S. dollar has on de-dollarization.5 Exchange rate volatility in Peru has been consistently lower than in a number of other emerging markets. Often, higher dollarization is invoked as the reason why Peru should have lower exchange rate volatility, as sudden and frequent exchange rate movements may have larger impacts on private sector balance sheets.6 However, limited exchange rate volatility can also contribute to higher risk taking and encourage borrowing in FX, as private agents would take a central bank policy of smoothing exchange rate fluctuations as insurance against particular positions in the FX market.

5. This chapter argues that higher exchange rate volatility, after controlling for global and country-specific factors, speeds up de-dollarization by making future exchange rate movements closer to a random walk, thus limiting incentives for holding dollar liabilities. The chapter is structured as follows. Key insights from the literature are summarized in Section B, followed by a discussion of our methodology and results in Section C. Section D looks more broadly at the issue of costs and benefits of exchange rate volatility. A final section concludes.

B. Brief Overview of the Literature

6. The literature explains the phenomenon of dollarization in different ways. Many papers state that dollarization (transaction and/or financial dollarization) results from the lack of confidence in the local currency (which is typically related to uncertainty associated with high or unpredictable inflation), or from the portfolio responses of risk-averse agents. The minimum variance portfolio model, developed by Ize and Levy-Yeyati (2003), suggests that the equilibrium level of dollarization may be non-zero in the absence of hyperinflation experiences, and demonstrates that risk-averse consumers prefer dollar savings when volatility of inflation rises relative to the real exchange rate. Moron and Castro (2003), De Nicolo et al. (2005), and Rennhack and Nozaki (2006), also find empirical support for this hypothesis.

7. The experience with de-dollarization emphasizes that a precondition for durable de-dollarization is credible macroeconomic management.7 De-dollarization requires restoring the functioning of, and trust in, the national currency as a unit for saving and intermediation. Stable and low inflation increases the confidence in the local currency, thereby reducing the need for using FX to preserve purchasing power. Credible monetary and fiscal policies along with the development of local currency markets supported de-dollarization in Chile (Herrera and Valdés, 2004), in Israel (Galindo and Leiderman, 2005) and in several other countries (De Nicolo et al, 2005). Inflation targeting has also been found to be more conducive to de-dollarization than other monetary arrangements (Rennhack and Nozaki, 2006; and Catão and Terrones, 2016, specifically for the case of Peru). However, once macroeconomic stability is achieved, the impact of inflation or sovereign spreads (such as EMBI) has been found to be too small to contribute significantly to further de-dollarization (Garcia-Escribano and Sosa, 2011). Indeed, dollarization can be quite persistent even after macroeconomic stability is achieved (Reinhart et al., 2003; Galindo and Leiderman, 2005; Castillo and Winkelried, 2005).

8. Macro and micro-prudential policies can also help reduce dollarization over time. These can include differential treatment of reserve requirements on FX versus local currency deposits (e.g. higher reserve requirements on FX deposits, different remuneration, or requiring reserve requirements on FX deposits to be in local currency), stricter prudential requirements (e.g. higher liquidity ratios on FX liquidity, charging higher risk premia on deposit insurance for FX deposits), lower loan-to-value limits and/or stricter limits on collateral evaluation or requirements, and limits on open FX positions. The latter typically are linked to the findings that reductions in deposit dollarization help speed up credit de-dollarization (Luca and Petrova, 2007). Kokenyne et al. (2010) provides empirical support for the effectiveness of micro-prudential measures. Garcia-Escribano and Sosa (2011) show that macro-prudential regulations (especially reserve requirements and prudential regulations) contributed to credit de-dollarization in four Latin American countries (including Peru), but had a more limited impact on deposit de-dollarization. Lower insurance for FX deposits, however, can also lead to lower financial intermediation (Moron and Castro, 2003).

9. Deepening local currency financial markets and broadening savings options are other factors contributing to de-dollarization. Liquid bond markets offering a range of different savings instruments can act as alternative investment opportunities to dollar deposits (e.g. including the ability for the public to invest directly in local currency government bonds). It can also help extend the yield curve of public bonds. Garcia-Escribano and Sosa (2011) find this effect to be significant. Indexation, if credible, can provide a bridge to promote investments in local currency-denominated assets (Ize and Levy-Yeyati, 2005), and be gradually phased out over time as confidence in local currency denominated assets increases (for instance, as it was the case in Chile or Colombia).

10. Finally, several studies show a link between de-dollarization and exchange rate flexibility. Allowing two-way exchange rate movements makes foreign exchange risk more apparent, and hence introduces incentives for lower dollarization (Hardy and Pazarbasioglu, 2006) or the development of hedging instruments. Empirical evidence for this is shown in Kokenyne et al. (2010) and is found significant in two out of the four countries studied by Garcia-Escribano and Sosa (2011) in Latin America.

C. Empirical Methodology and Results

11. As Peru meets many of the policies or characteristics conducive to de-dollarization, the missing link seems to be higher exchange rate volatility, which is the focus of this chapter. Peru’s inflation has been among the lowest in Latin America in the last decade, and monetary policy conduct has benefited from the generally prudent fiscal policy evident from low public debt. In addition, Peru also had several micro and macro prudential policies already in place before the new de-dollarization measures were introduced. For instance, there is a two percent tax on checks denominated in FX, higher reserve requirements on FX deposits, and higher loan-to-value ratios and risk weights on FX loans and mortgage credit denominated in FX. While Peru’s local currency markets are still in the process of deepening, Peru issues local currency bonds with sizeable maturities, and the presence of pension funds provides an opportunity to deepen liquidity and longer-term savings instruments. Yet, as highlighted before, exchange rate volatility in Peru remains much below that of its peers at similar dollarization levels.

A03ufig05

Average Daily Exchange Rate Volatillity at Different Levels of Loan Dollarization

Citation: IMF Staff Country Reports 2016, 235; 10.5089/9781475582741.002.A003

Sources: IFS statistics, and Fund staff calculations.

12. Even though exchange rate volatility per se could be related to dollarization levels, this chapter focuses on how policy affects exchange rate volatility and, thus, dollarization. The chapter uses a two-stage approach to assess the impact of policy behavior on exchange rate volatility and de-dollarization of bank FX lending. First, the volatility of daily exchange rate changes (averaged over the quarter) is “purged” of country-specific terms-of trade changes and measures of global volatility, using an econometric model with cross-country panel fixed effects. The residual volatility is interpreted as variability that is driven by policy behavior, and not related to global factors or terms-of-trade shocks. In the second step, changes in loan dollarization are regressed on a number of explanatory variables, including this measure of residual exchange rate volatility. The latter also follows a panel fixed effects specification. The focus is on explaining loan de-dollarization in the domestic banking system as FX assets of the domestic banking system carry a greater risk to financial stability than the dollarization of deposits in the banking system.

13. The regressions use a large sample of emerging market economies covering almost two decades of data. The database consists of quarterly loan dollarization for a sample of 45 emerging market economies,8 but includes countries with fixed or quasi-fixed exchange rate regimes (based on the IMF’s AREAER metric) where exchange rate volatility would be associated only to re-alignments. Excluding countries with fixed or quasi-fixed exchange rate regimes reduced the sample to 33 countries, spanning the period 1997–2015 (unbalanced panel). The analysis relates closely to the work of Kokenyne et al. (2010) who used data for 21 countries during the 2000s, a period of exchange rate appreciation for most emerging markets, and focused on headline exchange rate volatility, as opposed to policy-induced exchange rate volatility. Data were sourced from the IFS’s monetary and financial working data statistics (Standardized Report Forms) and complemented by data from country authorities’ websites, where available.

Regression Specifications

The first step regression has the following form: Exchange rate volatility, deri, measured as the standard deviation of daily percentage changes in the standardized bilateral exchange rate to the relevant FX currency (U.S.$, Swiss Franc, or Euro) is regressed on the q-o-q change in the terms-of-trade, tot, one period lagged, and a measure of global volatility, VIX, which is the average of the value of the VIX during a given quarter t. Alternative specifications use the average of emerging market currency volatility as a proxy for global volatility. Country specific effects are Vi for country i at time t and ε¡,t is the residual.

Hence, in the first stage, the specification for the panel fixed effects is:

derii,t=α+β1*toti,t1+β2*vixt+vi+ɛi,t

With residi,t equal to derii,t minus the predicted value derilt.

The second stage, the specification for the panel fixed effects model is as follows:

where dedloan reflects the percentage-point change in loan de-dollarization between Q4 of year t and Q4 of year t-1 (with a negative sign indicating a reduction in dollarization), residt-i reflects the residual volatility, loanlevelt-1 stands for the level of loan dollarization at the end of the previous period and thus controls for mean-reversion properties, and the vector Z includes a number of additional controls. Country-specific effects are for country i and µi,t is the residual. Loan dollarization and changes thereof are measured at constant (2006Q1) exchange rates.

We test the significance of the following control variables:

• Inflvol: the average volatility of q-o-q CPI inflation. High average inflation volatility is expected to be positively associated with dollarization. We also tested whether high average q-o-q inflation (infl) itself is associated with higher dollarization.

• D_appr: A dummy variable for periods of appreciation of the bilateral exchange rate to test whether periods of appreciation speed up loan de-dollarization by the expectation of increasing the value of the local currency. Appreciation, however, may be the result of large capital inflows, which may directly add to dollarization.

• Irdiff: The real interest rate differential between local currency and foreign currency loans. A higher interest rate differential is expected to be associated with slower loan de-dollarization, as local currency borrowing is more expensive. For some countries, we were able to obtain country-specific information on FX and local currency interest rates, but for others we used generic US$, Euro, or Swiss franc interest rates.

• D_it: a dummy variable for the presence of IT targeting to test whether this is associated with faster de-dollarization.

• Itresid: we also assess whether inflation targeting has an impact when interacted with residual exchange rate volatility.

• Fraser_d: the change in the Fraser index, as a proxy for improvements in institutional quality and trust in local institutions.

14. Lags are used to partially address the problem of endogeneity.

The problem of endogeneity stems from the fact that, as highlighted above, low exchange rate volatility may be the result and also the cause of financial dollarization. High dollarization poses risks through balance-sheet effects and may therefore lead to a ‘fear of floating’ or a tendency to more gradually smooth the exchange rate path in the face of sudden shocks. But such smoothing or an implicit insulation against FX risks may also trigger private agents to take more risks in the FX market, leading to higher dollarization levels in the economy. In this sense, dollarization and low exchange rate volatility may be mutually enforcing. This also leads to the proposition that there could be multiple states of the world (i.e. equilibria)—one in which high dollarization typically coincides with low exchange rate volatility, while the other features low dollarization with higher tolerance for exchange rate flexibility. The possible difficulty of moving from one equilibrium to another may be why the literature has found very few cases of successful de-dollarization over time; dollarization is typically very persistent and some countries never de-dollarize. In our sample, the distribution of dollarization levels is U-shaped, giving some credence to the conjecture of stable equilibria at extreme events.9

A03ufig06

Distribution of Dollarization Levels (=x)

(% of Sample Obs.)

Citation: IMF Staff Country Reports 2016, 235; 10.5089/9781475582741.002.A003

Sources: IFS statistics, and Fund staff calculations.

15. Our results show that exchange rate volatility (or the lack of it because of policy actions) matters and is statistically significant. First, basic descriptive statistics show that residual exchange rate volatility, as measured in the first stage of our analysis, was much higher for countries that subsequently became successful in significantly reducing loan dollarization (measured as a reduction of loan dollarization of at least 20 ppts over the sample period, to below 20 percent).

Table 1.

Residual Volatility

article image
Sources: Fund staff calculations.1/ Reduction by at least 20 PPTS to below 20 percent.2/ Residual volatility prior to becoming successful at de-dollarization.

16. Second, panel regressions show that residual volatility is significantly related to reductions in loan dollarization. While our econometric results support the mean-reversing properties of dollarization, the negative sign for our volatility measure also holds when using an alternative measure as dependent variable—the percentage change in loan dollarization—a specification that does not have mean-reverting properties. The interest rate differential has the expected positive sign and is significant at the 5 or 10 percent level in most specifications. However, periods of appreciation, the presence of inflation targeting, or inflation volatility are not significant factors for the dynamics of de-dollarization (even though the IT dummy usually has the expected negative sign). Garcia-Escribano and Sosa (2011) also did not find macroeconomic variables to have significant explanatory power, likely because most countries in the sample already achieved macro stabilization.

Table 2.

Dependent Variable: 90-Day Standard Deviation of Daily ER Percentage Changes

article image
Sources: Fund staff calculations.1/ FE indicates fixed effects, RE indicates random effects.
Table 3.

Dependent Variable: PPT Change in Loan Dollarization

article image
Sources: Fund staff calculations.1/ From regression of ER volatility on vix, terms of trade changes.
Table 4.

Dependent Variable: PPT or Percentage Change in Loan Dollarization

(Sample Restricted to Countries with Loan Dollarization Exceeding 25 Percent in at Least One Year)

article image
Sources: Fund staff calculations.1/ From regression of ER volatility on vix, terms of trade changes.2/ Outliers (bottom 5 and top 95 percentile observations) dropped from regression.

17. The results are robust to a number of alternative specifications. First, the first stage results are very similar when using a measure of emerging market currency volatility instead of the VIX as a measure of global volatility. Second, regressions for a more restricted sample of countries with a more pronounced dollarization prevalence/problem (where dollarization was at least 25 percent at one moment in the sample), or econometric specifications using random effects (as opposed to fixed effects) produced similar results. The introduction of lagged values for inflation, inflation volatility, periods of appreciation, and contemporary values for residual exchange rate volatility have not affected the conclusions in this chapter either.

D. Costs and Benefits

Costs

18. While a dose of healthy volatility is shown to help reduce dollarization, a number of caveats need to be taken into account. First, there may be a strong case to limit excessive volatility under disorderly market conditions. In those cases, volatility may encourage herding behavior and destabilize markets, rather than promote healthy price discovery. Indeed, the analysis in IMF (2016) suggests that exchange rate volatility may raise CDS spreads; while the level of the exchange rate does not seem to affect CDS spreads, sudden changes do.

19. Exchange rate volatility may also pose higher risks to unhedged FX borrowers, but this risk has significantly declined in Peru. This balance sheet effect has been quantified to explain 70 percent of Peru’s output and investment decline in the aftermath of the 1998 Russian crisis, when dollarization levels in Peru reached about 70 percent (Gondo and Orrego, 2011). However, now that dollarization has fallen significantly, risks from the balance sheet effect have decreased. Ramirez-Rondan (2015) estimate that there is a critical threshold when negative balance-sheet effects dominate the otherwise positive competitiveness improvements from local currency depreciation. Their estimates put this threshold at about 32 percent (of dollar lending), based on a panel of 69 Peruvian firms from 2003–13. So far, Peruvian firms have withstood the stress from a cumulative depreciation against the U.S. dollar since 2011 of some 30 percent quite well. In addition, supervisory data suggest that losses to banks from FX exposures on the total loan portfolio stand at a third of the dollarization ratio, or 11 percent of total loans. For certain loan categories, such as mortgages, vehicles, and loans to SMEs, total FX exposure risks are higher (at around 14, 20 and 24 percent respectively as of end-February 2016) but they are declining steadily.

A03ufig07

Peru. Dollarization and Banks’ FX Credit Risk Exposure

(Share of Total)

Citation: IMF Staff Country Reports 2016, 235; 10.5089/9781475582741.002.A003

Sources: Superintendencia de Banca, Segurosy AFP.
A03ufig08

Peru. Dollarization and Banks’ FX Credit Risk Exposure

(Share of Total)

Citation: IMF Staff Country Reports 2016, 235; 10.5089/9781475582741.002.A003

Sources: Superintendencia de Banca, Segurosy AFP.

Benefits

20. The benefits of exchange rate volatility and flexibility extend beyond aiding de-dollarization. First, a rapid adjustment of the exchange rate should engender speedier adjustment of the REER and avoid the creation of inefficient allocation of resources. Second, by removing notions of implicit guarantees provided by limited exchange rate risk, volatility may help develop a market for hedging. Finally, a higher tolerance for volatility and the speed of trend changes may reduce the need for exchange rate interventions. Peru has actively used FX intervention in both phases of the commodity prices cycle—when copper prices rose and when they fell—leaning against the wind while limiting volatility. However, with commodity prices expected to stay lower for longer and taking into account the significant sales of reserves so far, the value of preserving the use of Peru’s still ample reserves seems to have increased.

A03ufig09

Spot Intervention (Cumulative, US$ Million) and Copper Price (US$ per Metric Tonne)

Citation: IMF Staff Country Reports 2016, 235; 10.5089/9781475582741.002.A003

Sources: Banco Central de Reserva del Peru, World Economic Outlook, and Fund staff calculations.
A03ufig10

FX Intervention Dec 15-Jan 2016

(US$ change in reserves adj. for exchange rate changes, as % of end-2014 GIR)1/

Citation: IMF Staff Country Reports 2016, 235; 10.5089/9781475582741.002.A003

Sources: IFS statistics, Banco Central de Rerserva del Peru, and Fund staff calculations.1/ Spot (red) and non-spot (pink) intervention for Peru.
A03ufig11

Peru: Components of NIR and Cumulative Spot Intervention

(US$ million)

Citation: IMF Staff Country Reports 2016, 235; 10.5089/9781475582741.002.A003

Sources: Banco Central de Reserva del Peru, and Fund staff estimates.

E. Conclusion

21. This chapter shows that higher exchange rate volatility can contribute to the authorities’ de-dollarization agenda. Peru has enjoyed over a decade of low and stable inflation, but even though dollarization has declined markedly, it remains relatively high. This chapter shows, using a panel of 33 emerging market countries, that, after controlling for terms-of-trade and global shocks, residual exchange rate volatility is positively associated with faster de-dollarization. This result is robust to a number of alternative specifications. Hence, allowing greater day-to-day volatility of the exchange rate in Peru may help to accelerate the de-dollarization process in Peru.

22. Measures of exchange rate volatility suggest that volatility is evolving in that direction already. Daily exchange rate volatility in Peru is still lower compared to a number of peers. However, headline volatility has increased markedly since late 2015 (panel chart 1). After controlling for terms-of-trade shocks and global volatility, exchange rate volatility is currently also above that in the pre-taper tantrum episode of mid-2013 or non-crisis periods in the past decade. Spot intervention also tapered despite high global volatility. Finally, controlling for the impact of the electoral cycle, exchange rate volatility also seems to have increased. Together, the available evidence suggests that Peruvian authorities have been gradually allowing greater exchange rate volatility.

Figure 1.
Figure 1.

Exchange Rate Volatility in Peru

Citation: IMF Staff Country Reports 2016, 235; 10.5089/9781475582741.002.A003

Sources: Banco Central de Rerserva del Peru, Bloomberg, and Fund staff calculations.1/ First round of presidential elections (t-40). Second round (t). For 2016, first round of presidential elections is t.

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1

Prepared by G. Everaert (SPR).

2

While we use the term de-dollarization in this chapter, for most countries in Europe, FX lending consists of lending in Euros or Swiss Francs.

3

For this reason, Peru’s central bank also relies on FX intervention and reserve requirements to conduct monetary policy. Peru’s central bank also holds ample international reserves to meet potential FX liquidity pressures.

4

Deposit dollarization, however, did not fall commensurately. To close banks’ open FX position and supply soles to the financial sector to avoid a credit crunch, the central bank provided FX repos to commercial banks. This facilitated the conversion of FX lending into sol lending.

5

For countries where lending is primarily in Euros or Swiss Francs, the bilateral exchange rate vis-a-vis the Euro or the Swiss Franc is used.

6

Ize and Levy-Yeyati summarize the literature on balance-sheet effects in highly dollarized economies. Consistently with fear of floating when dollarization is high, Kliatskova and Mikkelsen (2016) show that in countries with large FX corporate debt, the central bank reacts more strongly to exchange rate changes, both by intervening in the foreign exchange market and by changing its monetary stance.

7

Successful cases of persistent de-dollarization often cited in the literature are Israel, Mexico, Poland, and Chile (see for instance, Reinhart, Rogoff, and Savastano, 2003; Galindo and Leiderman, 2005).

8

No data were obtained for China, India, Argentina, Sri Lanka, Vietnam.

9

Peru, in this respect, is aiming to move from one equilibrium to the other.

Peru: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.
  • View in gallery

    Loans and Deposits in FX

    (Percent of Total)

  • View in gallery

    Loan Dollarization

    (% of total, at constant exch. rate)

  • View in gallery

    Change in Loan Dollarization in Peru

    (PPT Change, at constant exch. rate)

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    Selected Latin American Currencies

    (LC/US$; Index Feb 2, 2015 =100)

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    Average Daily Exchange Rate Volatillity at Different Levels of Loan Dollarization

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    Distribution of Dollarization Levels (=x)

    (% of Sample Obs.)

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    Peru. Dollarization and Banks’ FX Credit Risk Exposure

    (Share of Total)

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    Peru. Dollarization and Banks’ FX Credit Risk Exposure

    (Share of Total)

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    Spot Intervention (Cumulative, US$ Million) and Copper Price (US$ per Metric Tonne)

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    FX Intervention Dec 15-Jan 2016

    (US$ change in reserves adj. for exchange rate changes, as % of end-2014 GIR)1/

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    Peru: Components of NIR and Cumulative Spot Intervention

    (US$ million)

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    Exchange Rate Volatility in Peru