Dollarization and Financial Development
40 Pages Posted: 16 Oct 2018
Date Written: September 2018
Despite significant strides in financial development over the past decades, financial dollarization, as reflected in elevated shares of foreign currency deposits and credit in the banking system, remains common in developing economies. We study the impact of financial dollarization, differentiating across foreign currency deposits and credit on financial depth, access and efficiency for a large sample of emerging market and developing countries over the past two decades. Panel regressions estimated using system GMM show that deposit dollarization has a negative impact on financial deepening on average. This negative impact is dampened in cases with past periods of high inflation. There is also some evidence that dollarization hampers financial efficiency. The results suggest that policy efforts to reduce dollarization can spur faster and safer financial development.
Keywords: Dollarization, financial development, financial deepening, financial inclusion and developing economies, financial inclusion, developing economies, General
JEL Classification: G10, G20, O16
Suggested Citation: Suggested Citation