Articles reviewing IMF research on dollarization and on the relationship between macroeconomic policies and income distribution; country/area study: The Euro Area; summaries of Second Annual IMF Research Conference and Investor Relations Seminar; list of external publications of IMF staff; IMF working papers; visiting scholars at the IMF.


Articles reviewing IMF research on dollarization and on the relationship between macroeconomic policies and income distribution; country/area study: The Euro Area; summaries of Second Annual IMF Research Conference and Investor Relations Seminar; list of external publications of IMF staff; IMF working papers; visiting scholars at the IMF.

Andrew Berg

Dollarization manifests itself in two forms: one voluntary and the other largely involuntary. The former type, called full or de jure dollarization, occurs when a country adopts a foreign currency, often the U.S. dollar, as its sole legal tender. The involuntary form, called partial or de facto dollarization, is less under the direct control of the authorities and occurs when a foreign currency circulates alongside a national currency, with bank deposits and loans possibly also denominated in a foreign currency. Most researchers place full dollarization within the realm of exchange rate regime choices in the economic literature, while partial dollarization is typically analyzed as an outcome of disorderly macroeconomic conditions. These two branches of analysis are nonetheless closely linked, as full dollarization is a more attractive choice for countries that find themselves largely dollarized de facto. This article surveys recent research at the IMF on the theoretical and empirical aspects of both partial and full dollarization.

Much of the research on partial dollarization has focused on its underlying causes. Savastano (1996) emphasizes that, while macroeconomic instability is the cause of dollarization, its manifestation depends on the institutional framework. Countries that did not allow dollar deposits, for example, observed more capital flight and increased use of foreign currency, whereas countries with sufficiently flexible financial systems, such as Brazil, saw a proliferation of indexed domestic currency instruments, instead of dollarization.1 A central feature of de facto dollarization is that it tends not to abate, even after the macroeconomic instabilities that caused it have been brought under control. Mongardini and Mueller (2000) find some econometric evidence of such a “ratchet effect” in foreign currency deposits in the Kyrgyz Republic, but not in cash dollars in circulation (for which they have some survey data).2

The literature on partial dollarization makes a distinction between currency substitution—dollarization of money as a means of payment—and asset substitution, which refers to dollarization of stores of value. Earlier research, such as Agénor and Khan (1996), focused on currency substitution, examining the rate of return on foreign currency in money demand functions.3 As Savastano (1996) notes, however, most of the available data is on interest-bearing, foreign-currency time deposits, for which a focus on asset substitution makes more sense. Moreover, the Asian crisis motivated increased analysis of dollarized loans as well as other financial deposits; large quantities of loans were dollar-denominated and this had important implications for the economic effects of exchange rate fluctuations. More recent research on dollarization has thus concentrated on asset substitution.

Ize and Levy-Yeyati (1998) show that the degree to which the financial system is dollarized depends on relative volatilities of the inflation rate (more volatility makes foreign currency deposits less risky) and the real exchange rate (more volatility makes these deposits more risky in terms of domestic prices). Ize and Levy-Yeyati also explain the persistence of dollarization after stabilization in terms of the fact that real exchange rate volatility, in many cases, decreases faster than inflation volatility.4 Catão and Terrones (2000) present a model of the banking system which emphasizes how banking and credit market imperfections determine deposit and loan dollarization.5 Mourmouras and Russell (2000) show how, in the absence of interest-bearing bank deposits, foreign currency surrender requirements may lead to smuggling as a way for residents to accumulate cash dollars.6

The implications of partial dollarization for monetary and exchange rate policies and financial supervision is critical to the operational work of the IMF. Berg and Borensztein (2000) conclude that a high degree of currency substitution strengthens the case for fixing the exchange rate, while dollarization as asset substitution has various offsetting effects.7 Ize (2001) argues that inflation targeting may be feasible even in the presence of substantial currency and asset substitution.8 Baliño and others (1999) emphasize that dollarization—understood as asset substitution—has implications similar to those of capital account openness in general.9 Poirson (2001) concludes that countries with a high degree of partial dollarization are, in fact, more likely to choose a more rigid exchange rate regime.10

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IMF researchers have analyzed a variety of country experiences with partial dollarization. Unteroberdoerster (2002) discusses the case of Vietnam; Fritz-Krockow and others (2001) look at Haiti; and Rumbaugh and others (2000) analyze dollarization in Cambodia. Zamaróczy and Sa (forthcoming) estimate the amount of cash dollars in circulation in Cambodia and conclude that the country is almost completely dollarized. Lizondo and others (2001) analyze monetary policy and the advisability of inflation targeting in Peru.11

Interest in full dollarization has grown sharply in recent years, both out of dissatisfaction with the alternatives and because several countries, including El Salvador and Ecuador, joined Panama among the ranks of sizable, fully dollarized countries. Berg and Borensztein (2000) analyze the costs and benefits of full dollarization as compared with its closest alternative, a currency board. They attempt to quantify the tradeoffs in the case of Argentina, in particular the cost of foregone seignorage and possible benefits from lower borrowing costs. They observe, however, that the potentially most important considerations—notably, the loss of the “exit option” to devalue in the face of major shocks, and the advantages of deeper integration—are harder to evaluate. They conclude that two groups of countries are most likely to find dollarization attractive: those already highly integrated with the United States (or other country whose currency is to be adopted) and those already highly dollarized de facto.12 Calvo and Reinhart (2000) also point out that countries that are already substantially dollarized de facto will lose little in going to full dollarization.13

Several papers have looked more closely at the various costs and benefits of dollarization. Bogetić (2000) argues that growing partial dollarization and financial development imply that seignorage losses from dollarization would be small in many cases.14 Parsley and Wei (2001) find that currency boards, and especially dollarization, strongly promote goods market integration, far beyond what is directly associated with exchange rate stability alone.15

Dollarization is sometimes seen as an irreversible decision but Liberia, one of only two countries with a long history of dollarization (the other is Panama) reintroduced its own currency in the 1980s. Indeed, Abrams and Cortés-Douglas (1993) provide what amounts to a manual for introducing a new currency, based on the experiences of countries that “deruble-ized” after the breakup of the Soviet Union.16

As Mishkin and Savastano (2000) emphasize, actual experiences with dollarization are limited, and the long history of dollarization in the most important case, Panama, is mixed.17 Bogetić (2000) reviews the experience of Panama and concludes that it has been broadly positive. De la Torre and others (forthcoming) describe the deep banking and exchange rate crisis that led to Ecuador’s January 2000 move to full dollarization and emphasize dollarization’s stabilizing role; Offerdal and others (2000) provide an early, cautiously positive, assessment of the outcome.18 The addition of countries like Ecuador and El Salvador to the ranks of fully dollarized countries will provide important material for future research.


Miguel Savastano, “Dollarization in Latin America: Recent Evidence and Some Policy Issues,” IMF Working Paper 96/4, 1996; also published in P.D. Mizen and E.J. Pentecost, eds., The Macroeconomics of International Currencies: Theory, Policy and Evidence (Aldershot: Edward Elgar: 1996).


Joannes Mongardini and Johannes Mueller, “Ratchet Effects in Currency Substitution: An Application to the Kyrgyz Republic,” IMF Staff Papers, Vol. 47, No. 2, pp. 218-37, 2000. Also see notable earlier work on dollarization by Ratna Sahay and Carlos Végh, “Dollarization in Transition Economies: Evidence and Policy Implications,” IMF Working Paper 95/96, 1995; also published in P.D. Mizen and E.J. Pentecost, eds., The Macroeconomics of International Currencies: Theory, Policy and Evidence (Aldershot: Edward Elgar, 1996).


Pierre-Richard Agénor and Mohsin S. Khan, “Foreign Currency Deposits and the Demand for Money in Developing Countries,” Journal of Development Economics, Vol. 50, pp. 101–18, 1996; Stanley Black, Charalambos Christofides, and Alex Mourmouras use a model of currency substitution to analyze money demand during the run-up to a currency crisis in “Convertibility Risk: The Precautionary Demand for Foreign Currency in a Crisis,” IMF Working Paper 01/210, 2001.


Alain Ize and Eduardo Levy-Yeyati, “Dollarization of Financial Intermediation: Causes and Policy Implications,” IMF Working Paper 98/28, 1998; also forthcoming in the Journal of International Economics as “Financial Dollarization.”


Luis Catão and Marco Terrones, “Determinants of Dollarization: The Banking Side,” IMF Working Paper 00/146, 2000.


Alex Mourmouras and Steven H. Russell, “Smuggling, Currency Substitution and Unofficial Dollarization: A Crime-Theoretic Approach” IMF Working Paper 00/176, 2000.


Andrew Berg and Eduardo Borensztein, “The Choice of Exchange Rate Regime and Monetary Target in Highly Dollarized Economies,” IMF Working Paper 00/29, 2000.


Alain Ize, “Implications of Partial Dollarization for Inflation Targeting: A View from the Dollarization Literature,” (in Spanish) in Revista de Estudios Económicos, Nro. 7 (junio 2001), Banco Central de Reserva del Perú.


Thomas Baliño, Adam Bennett, and Eduardo Borensztein, “Monetary Policy in Dollarized Economies,” IMF Occasional Paper No. 171, 1999.


Hélène Poirson, “How Do Countries Choose Their Exchange Rate Regime?” IMF Working Paper 01/46, 2001.


Olaf Unteroberdoerster, “Foreign Currency Deposits in Vietnam—Trends and Policy Issues,” in David Cowen, Olaf Unteroberdoerster, Chanpen Puckahtikom, and Nita Thacker, Vietnam: Selected Issues and Statistical Appendix, IMF Country Report 02/5, 2002; Bernard Fritz-Krockow, Eric Verreydt, Werner Keller, and Randa Sab, “Deposit and Loan Dollarization in Haiti,” in Haiti: Selected Issues, IMF Staff Country Report No. 01/04, 2001; Thomas Rumbaugh, Kotaro Ishi, Hong Liang, and Atsushi Masuda, “Dollarization and the Monetary Regime,” in Cambodia: Selected Issues, IMF Staff Country Report No. 00/135, 2000; Mario de Zamaróczy and Sopanha Sa, “Macroeconomic Adjustment in a Highly Dollarized Economy: The Case of Cambodia,” forthcoming IMF Working Paper; and Saul Lizondo, Andrew Wolfe, Dale Chua, Juan Pablo Cordoba, and Andrea Richter, “The Design and Challenge of Monetary Policy in Peru,” in Peru: Selected Issues, IMF Staff Country Report No. 01/51, 2001. IMF country reports are available online in full-text format at


Andrew Berg and Eduardo Borensztein, “The Pros and Cons of Full Dollarization,” IMF Working Paper 00/50, 2000, forthcoming in James Dean, Dominick Salvatore, and Thomas Willett, eds., The Dollarization Debate (Oxford University Press).


Guillermo A. Calvo and Carmen Reinhart, “Reflections on Dollarization,” in Alesina and Barro, eds., Currency Unions (Stanford: Hoover Institute Press), 2000. See also their “Capital Flow Reversals, the Exchange Rate Debate, and Dollarization,” in Finance and Development, Vol. 36 (September), pp. 13–15, 1999.


Zelko Bogetić, “Official Dollarization: Current Experiences and Issues,” Cato Journal (fall), pp. 179–213, 2000. See also by the same author “Full Dollarization: Fad or Future?” Challenge, March/April 2000, pp. 17–48; “The Calculus of Full Dollarization,” Central Banking, Vol. 11, No. 2, 2000, and “Seignorage and Dollarization,” Central Banking, Vol. 10, No. 4, 2000.


David Parsley and Shang-Jin Wei, “Limiting Currency Volatility to Stimulate Goods Market Integration: A Price-Based Approach,” IMF Working Paper 01/197, 2001.


Richard Abrams and Hernán Cortés-Douglas, “Introduction of a New National Currency: Policy, Institutional, and Technical Issues,” IMF Working Paper 93/49, 1993.


Frederic Mishkin and Miguel Savastano, “Monetary Policy Strategies for Latin America,” NBER Working Paper No. 7617, 2000.


Augusto de la Torre, Roberto García-Saltos, and Yira Mascaro, “Banking, Currency, and Debt Meltdown: Ecuador Crisis in the Late 1990s,” forthcoming in Latin American Financial Crises, ed. by Albert Berry (University of Toronto); and Erik Offerdal, Mariano Cortés, Mayra Zermeño, Alvin Hilaire, Gabriela Inchauste, Fernando Delgado, Antonio Pancorbo, and Werner Keller, Ecuador: Selected Issues and Statistical Annex, IMF Staff Country Report No. 00/125, 2000.

Call for Papers Third Annual IMF Research Conference

The third Annual Research Conference of the IMF will take place at the organization’s headquarters in Washington, DC, on November 7–8, 2002. The conference will provide a forum to discuss innovative research by IMF staff and leading outside economists and will facilitate an exchange of views among the participants. The main theme of this year’s conference will be Capital Flows and Global Governance, which can be interpreted broadly. More information and details about possible topics can be found at the Research at the IMF website at

Interested contributors should submit a proposal to the Program Committee (email to by March 22, 2002. The Program Committee will evaluate all proposals in terms of originality, analytical rigor, and policy relevance and will communicate its decision by late April. The Program Committee consists of S. Wei (Chair), X. Debrun, G. Gelos, H. Huang, O. Jeanne, L. Kodres, and A. Spilimbergo.

IMF Staff Papers, Special Issue November 2001 Proceedings of the First Annual IMF Research Conference

Edited by Eduardo Borensztein and Robert Flood

This special issue of IMF Staff Papers contains a selection of papers presented at the first annual IMF Research Conference held in Washington, DC, in November 2000. The papers in this volume were written by IMF authors and invited contributors from a group of distinguished outside scholars. Also included is the text of the first Mundell-Fleming lecture, delivered by Maurice Obstfeld, and a set of remarks by Robert Mundell on the intellectual history of the Mundell-Fleming model.

International Macroeconomics: Beyond the Mundell-Fleming Model

Maurice Obstfeld (University of California at Berkeley)

Do Monetary Handcuffs Restrain Leviathan? Fiscal Policy in Extreme Exchange Rate Regimes

Antonio Fatás (INSEAD and CEPR) and Andrew K. Rose (University of California at Berkeley)

Exchange Rate Regimes and Economic Performance

Eduardo Levy-Yeyati and Federico Sturzenegger (Universidad Torcuato Di Tella)

The Interest Rate-Exchange Rate Nexus in Currency Crises

Gabriela Basurto (Inter-American Development Bank) and Atish Ghosh (IMF)

Consumption and Income Inequality During the Transition to a Market Economy: Poland, 1985–92

Michael Keane (Yale University) and Eswar Prasad (IMF)

Bail-Ins, Bailouts, and Borrowing Costs

Barry Eichengreen (University of California at Berkeley) and Ashoka Mody (IMF)

Crisis Resolution and Private Sector Adaptation

Gabrielle Lipworth and Jens Nystedt (IMF)

IMF Staff Papers, the IMF’s scholarly journal, edited by Robert Flood, publishes selected high-quality research produced by IMF staff and invited guests on a variety of topics of interest to a broad audience, including academics and policymakers in IMF member countries. The papers selected for publication in the journal are subject to a rigorous review process using both internal and external referees. The journal and its contents (including an archive of articles from past issues) are available online at the Research at the IMF website: