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Financial Dedollarization: Policy Options. Eduardo Fernandez-Arias Inter-American Development Bank REGION I. Financial Dollarization. Asset substitution, not currency substitution Holdings of residents, not foreigners

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financial dedollarization policy options

Financial Dedollarization:Policy Options

Eduardo Fernandez-Arias

Inter-American Development Bank


financial dollarization
Financial Dollarization
  • Asset substitution, not currency substitution
  • Holdings of residents, not foreigners
  • This focus is highly relevant to the problem of financial dollarization in Region I countries and allows for feasible specific policy options.
Motivation: Financial fragility caused by currency mismatch of assets and liabilities within domestic economy
  • Exposure of peso earning dollar debtors (non-tradeable sector, home mortages)
  • Exposure of banking system (currency risk or credit risk)
  • Fiscal exposure due to all of the above
financial fragility due to financial dollarization is very dangerous
Financial fragility due to financial dollarization is very dangerous
  • Leads to fear of floating and super-fixed exchange rates (or de jure dollarization) that may end up catastrophically if unsustainable (e.g. Argentina)
  • Imperfections in international capital markets (e.g. sudden stops) lead to large real shocks that also deprive from liquidity: dollarized financial systems are fragile to both
  • Peso domestic financial systems may be a condition for healthy international financial integration
policy options
Policy Options
  • Correct/offset market imperfections that may lead to excessive financial dollarization (prudential financial and capital account regulation)
    • Social cost of financial collapse not priced in domestic dollar rates (payment system, economic networks)
    • Currency-blind explicit and implicit public guarantees discriminates in favor of dollar markets
  • Conduct consistent macroeconomic policy (XR, fiscal and debt management)
policy options1
Policy Options
  • Help complete domestic financial markets with peso instrument to substitute dollar instrument
    • Need long-duration instrument not subject to surprise inflation
    • Key: Indexation relevant to domestic borrowers and lenders to create attractive item in domestic portfolios
    • Key: Development of equity and equity-like markets
policy options2
Policy Options
  • Session II – Experience with policy options to avoid or revert financial dollarization
  • Session III – Analysis of policy options
  • Panel of Central Banks – The policymaker view and what is being done about it
panel of international financial institutions
Panel of International Financial Institutions
  • How can IFIs help in fostering local currency markets with lending programs or program conditionality? Help as financial agents?
  • IFIs lending in pesos after selling indexed riskless bonds to dollar saving residents (e.g. pension funds):
    • Avoid crowding out of peso savings
    • Easier than convincing foreigners to invest in pesos (original sin)
    • May pave the way to Eichengreen and Hausmann proposal