Currency Substitution in Latin America : Lessons from the 1990s

The authors study how agents in Latin America allocate their balances between dollar-denominated and domestic currency-denominated accounts. They empirically determine the causes of currency substitution, its significance in recent banking crises,...

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Main Authors:	Gomis-Porqueras, Pere, Serrano, Carlos, Somuano, Alejandro
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2014
Subjects:	BALANCE SHEETS BANK ACCOUNTS BANK DEPOSITS BANKING CRISES BANKING SECTOR BANKING SYSTEM BANKRUPTCY BONDS CAPITALS CENTRAL BANK CENTRAL BANKS COMMON CURRENCY COUNTRY COMPARISONS CURRENCY CURRENCY SUBSTITUTION DEMAND ELASTICITY DEMAND FOR MONEY DEVALUATION DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT ECONOMICS DOMESTIC CURRENCIES DOMESTIC INFLATION ECONOMETRICS ECONOMIC ENVIRONMENT ECONOMIC GROWTH ECONOMIC THEORY ELASTICITY ELASTICITY OF SUBSTITUTION EMPIRICAL EVIDENCE ENDOGENOUS VARIABLES EXCHANGE RATE EXCHANGE RATE RISK EXCHANGE RATES EXOGENOUS SHOCKS EXPECTED VALUE EXPORTS FINANCIAL CRISES FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIATION FINANCIAL MARKETS FINANCIAL SECTOR FINANCIAL SYSTEM FLEXIBLE EXCHANGE RATES FOREIGN BANKS FOREIGN CURRENCY FOREIGN CURRENCY DEPOSITS FOREIGN EXCHANGE FOREIGN EXCHANGE CONTROLS GDP GDP PER CAPITA GROWTH RATE HIGH INFLATION INCOME INFLATION INFLATION RATE INSTITUTIONAL ARRANGEMENTS INSURANCE INTEREST RATE INTEREST RATES INTERMEDIATION INTERNATIONAL CURRENCY SUBSTITUTION INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL MONETARY FUND LEGAL TENDER LENDER OF LAST RESORT LOCAL CURRENCIES LOCAL CURRENCY MACROECONOMIC CONSEQUENCES MACROECONOMIC EFFECTS MACROECONOMIC FRAMEWORK MACROECONOMIC INSTABILITY MACROECONOMIC STABILIZATION MACROECONOMIC VARIABLES MACROECONOMIC VOLATILITY MEDIUM OF EXCHANGE MONETARY AGGREGATES MONETARY AUTHORITIES MONETARY POLICY MONETARY TARGETING MONEY BALANCES MONEY DEMAND MONEY MULTIPLIER MONEY STOCK MONEY SUPPLY MULTIPLIERS NATIONAL INCOME OPEN ECONOMIES OUTPUT POLICY RESEARCH POLITICAL ECONOMY PORTFOLIO POVERTY REDUCTION PREVIOUS CRISIS REAL INTEREST REAL INTEREST RATE REAL INTEREST RATES RISK AVERSE SAVINGS SEIGNIORAGE STABILIZATION STABILIZATION PROGRAM STABILIZATION PROGRAMS STANDARD DEVIATION STORE OF VALUE SYSTEMIC BANKING CRISES TIME SERIES VELOCITY OF MONEY VOLATILITY WEALTH
Online Access:	http://documents.worldbank.org/curated/en/2000/05/437673/currency-substitution-latin-america-lessons-1990s http://hdl.handle.net/10986/18845

id	okr-10986-18845
recordtype	oai_dc
spelling	okr-10986-188452021-04-23T14:03:46Z Currency Substitution in Latin America : Lessons from the 1990s Gomis-Porqueras, Pere Serrano, Carlos Somuano, Alejandro BALANCE SHEETS BANK ACCOUNTS BANK DEPOSITS BANKING CRISES BANKING SECTOR BANKING SYSTEM BANKRUPTCY BONDS CAPITALS CENTRAL BANK CENTRAL BANKS COMMON CURRENCY COUNTRY COMPARISONS CURRENCY CURRENCY SUBSTITUTION DEMAND ELASTICITY DEMAND FOR MONEY DEVALUATION DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT ECONOMICS DOMESTIC CURRENCIES DOMESTIC INFLATION ECONOMETRICS ECONOMIC ENVIRONMENT ECONOMIC GROWTH ECONOMIC THEORY ELASTICITY ELASTICITY OF SUBSTITUTION EMPIRICAL EVIDENCE ENDOGENOUS VARIABLES EXCHANGE RATE EXCHANGE RATE RISK EXCHANGE RATES EXOGENOUS SHOCKS EXPECTED VALUE EXPORTS FINANCIAL CRISES FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIATION FINANCIAL MARKETS FINANCIAL SECTOR FINANCIAL SYSTEM FLEXIBLE EXCHANGE RATES FOREIGN BANKS FOREIGN CURRENCY FOREIGN CURRENCY DEPOSITS FOREIGN EXCHANGE FOREIGN EXCHANGE CONTROLS GDP GDP PER CAPITA GROWTH RATE HIGH INFLATION INCOME INFLATION INFLATION RATE INSTITUTIONAL ARRANGEMENTS INSURANCE INTEREST RATE INTEREST RATES INTERMEDIATION INTERNATIONAL CURRENCY SUBSTITUTION INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL MONETARY FUND LEGAL TENDER LENDER OF LAST RESORT LOCAL CURRENCIES LOCAL CURRENCY MACROECONOMIC CONSEQUENCES MACROECONOMIC EFFECTS MACROECONOMIC FRAMEWORK MACROECONOMIC INSTABILITY MACROECONOMIC STABILIZATION MACROECONOMIC VARIABLES MACROECONOMIC VOLATILITY MEDIUM OF EXCHANGE MONETARY AGGREGATES MONETARY AUTHORITIES MONETARY POLICY MONETARY TARGETING MONEY BALANCES MONEY DEMAND MONEY MULTIPLIER MONEY STOCK MONEY SUPPLY MULTIPLIERS NATIONAL INCOME OPEN ECONOMIES OUTPUT POLICY RESEARCH POLITICAL ECONOMY PORTFOLIO POVERTY REDUCTION PREVIOUS CRISIS REAL INTEREST REAL INTEREST RATE REAL INTEREST RATES RISK AVERSE SAVINGS SEIGNIORAGE STABILIZATION STABILIZATION PROGRAM STABILIZATION PROGRAMS STANDARD DEVIATION STORE OF VALUE SYSTEMIC BANKING CRISES TIME SERIES VELOCITY OF MONEY VOLATILITY WEALTH The authors study how agents in Latin America allocate their balances between dollar-denominated and domestic currency-denominated accounts. They empirically determine the causes of currency substitution, its significance in recent banking crises, and the link between currency substitution, and volatility in macroeconomic aggregates. Their findings: The ratio of dollar deposits to broad money is strongly influenced by expectations of depreciation. They show that depositors in Latin America face some uncertainty and frictions when making their portfolio decisions. They explore the macroeconomic consequences of a dollarized economy. In particular, they find that, in the presence of currency substitution, past banking crises are good predictors of future crises. In other words, having a highly dollarized economy, increases the response of the banking system when there is a bad shock, which halts the outflow of capital. Once an economy is in crisis, however, having more dollar-denominated deposits in the banking system, increases the probability of a longer crisis in the future, because it increases exchange rate exposure in an already weak banking system. Finally, they show that the volatility of macroeconomic variables linked to the financial system, increases whenever the economy becomes more dollarized, which in turn makes the choice of monetary targets more difficult. 2014-06-30T18:56:36Z 2014-06-30T18:56:36Z 2000-05 http://documents.worldbank.org/curated/en/2000/05/437673/currency-substitution-latin-america-lessons-1990s http://hdl.handle.net/10986/18845 English en_US Policy Research Working Paper;No. 2340 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research Latin America & Caribbean Latin America
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English en_US
topic	BALANCE SHEETS BANK ACCOUNTS BANK DEPOSITS BANKING CRISES BANKING SECTOR BANKING SYSTEM BANKRUPTCY BONDS CAPITALS CENTRAL BANK CENTRAL BANKS COMMON CURRENCY COUNTRY COMPARISONS CURRENCY CURRENCY SUBSTITUTION DEMAND ELASTICITY DEMAND FOR MONEY DEVALUATION DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT ECONOMICS DOMESTIC CURRENCIES DOMESTIC INFLATION ECONOMETRICS ECONOMIC ENVIRONMENT ECONOMIC GROWTH ECONOMIC THEORY ELASTICITY ELASTICITY OF SUBSTITUTION EMPIRICAL EVIDENCE ENDOGENOUS VARIABLES EXCHANGE RATE EXCHANGE RATE RISK EXCHANGE RATES EXOGENOUS SHOCKS EXPECTED VALUE EXPORTS FINANCIAL CRISES FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIATION FINANCIAL MARKETS FINANCIAL SECTOR FINANCIAL SYSTEM FLEXIBLE EXCHANGE RATES FOREIGN BANKS FOREIGN CURRENCY FOREIGN CURRENCY DEPOSITS FOREIGN EXCHANGE FOREIGN EXCHANGE CONTROLS GDP GDP PER CAPITA GROWTH RATE HIGH INFLATION INCOME INFLATION INFLATION RATE INSTITUTIONAL ARRANGEMENTS INSURANCE INTEREST RATE INTEREST RATES INTERMEDIATION INTERNATIONAL CURRENCY SUBSTITUTION INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL MONETARY FUND LEGAL TENDER LENDER OF LAST RESORT LOCAL CURRENCIES LOCAL CURRENCY MACROECONOMIC CONSEQUENCES MACROECONOMIC EFFECTS MACROECONOMIC FRAMEWORK MACROECONOMIC INSTABILITY MACROECONOMIC STABILIZATION MACROECONOMIC VARIABLES MACROECONOMIC VOLATILITY MEDIUM OF EXCHANGE MONETARY AGGREGATES MONETARY AUTHORITIES MONETARY POLICY MONETARY TARGETING MONEY BALANCES MONEY DEMAND MONEY MULTIPLIER MONEY STOCK MONEY SUPPLY MULTIPLIERS NATIONAL INCOME OPEN ECONOMIES OUTPUT POLICY RESEARCH POLITICAL ECONOMY PORTFOLIO POVERTY REDUCTION PREVIOUS CRISIS REAL INTEREST REAL INTEREST RATE REAL INTEREST RATES RISK AVERSE SAVINGS SEIGNIORAGE STABILIZATION STABILIZATION PROGRAM STABILIZATION PROGRAMS STANDARD DEVIATION STORE OF VALUE SYSTEMIC BANKING CRISES TIME SERIES VELOCITY OF MONEY VOLATILITY WEALTH
spellingShingle	BALANCE SHEETS BANK ACCOUNTS BANK DEPOSITS BANKING CRISES BANKING SECTOR BANKING SYSTEM BANKRUPTCY BONDS CAPITALS CENTRAL BANK CENTRAL BANKS COMMON CURRENCY COUNTRY COMPARISONS CURRENCY CURRENCY SUBSTITUTION DEMAND ELASTICITY DEMAND FOR MONEY DEVALUATION DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT ECONOMICS DOMESTIC CURRENCIES DOMESTIC INFLATION ECONOMETRICS ECONOMIC ENVIRONMENT ECONOMIC GROWTH ECONOMIC THEORY ELASTICITY ELASTICITY OF SUBSTITUTION EMPIRICAL EVIDENCE ENDOGENOUS VARIABLES EXCHANGE RATE EXCHANGE RATE RISK EXCHANGE RATES EXOGENOUS SHOCKS EXPECTED VALUE EXPORTS FINANCIAL CRISES FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIATION FINANCIAL MARKETS FINANCIAL SECTOR FINANCIAL SYSTEM FLEXIBLE EXCHANGE RATES FOREIGN BANKS FOREIGN CURRENCY FOREIGN CURRENCY DEPOSITS FOREIGN EXCHANGE FOREIGN EXCHANGE CONTROLS GDP GDP PER CAPITA GROWTH RATE HIGH INFLATION INCOME INFLATION INFLATION RATE INSTITUTIONAL ARRANGEMENTS INSURANCE INTEREST RATE INTEREST RATES INTERMEDIATION INTERNATIONAL CURRENCY SUBSTITUTION INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL MONETARY FUND LEGAL TENDER LENDER OF LAST RESORT LOCAL CURRENCIES LOCAL CURRENCY MACROECONOMIC CONSEQUENCES MACROECONOMIC EFFECTS MACROECONOMIC FRAMEWORK MACROECONOMIC INSTABILITY MACROECONOMIC STABILIZATION MACROECONOMIC VARIABLES MACROECONOMIC VOLATILITY MEDIUM OF EXCHANGE MONETARY AGGREGATES MONETARY AUTHORITIES MONETARY POLICY MONETARY TARGETING MONEY BALANCES MONEY DEMAND MONEY MULTIPLIER MONEY STOCK MONEY SUPPLY MULTIPLIERS NATIONAL INCOME OPEN ECONOMIES OUTPUT POLICY RESEARCH POLITICAL ECONOMY PORTFOLIO POVERTY REDUCTION PREVIOUS CRISIS REAL INTEREST REAL INTEREST RATE REAL INTEREST RATES RISK AVERSE SAVINGS SEIGNIORAGE STABILIZATION STABILIZATION PROGRAM STABILIZATION PROGRAMS STANDARD DEVIATION STORE OF VALUE SYSTEMIC BANKING CRISES TIME SERIES VELOCITY OF MONEY VOLATILITY WEALTH Gomis-Porqueras, Pere Serrano, Carlos Somuano, Alejandro Currency Substitution in Latin America : Lessons from the 1990s
geographic_facet	Latin America & Caribbean Latin America
relation	Policy Research Working Paper;No. 2340
description	The authors study how agents in Latin America allocate their balances between dollar-denominated and domestic currency-denominated accounts. They empirically determine the causes of currency substitution, its significance in recent banking crises, and the link between currency substitution, and volatility in macroeconomic aggregates. Their findings: The ratio of dollar deposits to broad money is strongly influenced by expectations of depreciation. They show that depositors in Latin America face some uncertainty and frictions when making their portfolio decisions. They explore the macroeconomic consequences of a dollarized economy. In particular, they find that, in the presence of currency substitution, past banking crises are good predictors of future crises. In other words, having a highly dollarized economy, increases the response of the banking system when there is a bad shock, which halts the outflow of capital. Once an economy is in crisis, however, having more dollar-denominated deposits in the banking system, increases the probability of a longer crisis in the future, because it increases exchange rate exposure in an already weak banking system. Finally, they show that the volatility of macroeconomic variables linked to the financial system, increases whenever the economy becomes more dollarized, which in turn makes the choice of monetary targets more difficult.
format	Publications & Research :: Policy Research Working Paper
author	Gomis-Porqueras, Pere Serrano, Carlos Somuano, Alejandro
author_facet	Gomis-Porqueras, Pere Serrano, Carlos Somuano, Alejandro
author_sort	Gomis-Porqueras, Pere
title	Currency Substitution in Latin America : Lessons from the 1990s
title_short	Currency Substitution in Latin America : Lessons from the 1990s
title_full	Currency Substitution in Latin America : Lessons from the 1990s
title_fullStr	Currency Substitution in Latin America : Lessons from the 1990s
title_full_unstemmed	Currency Substitution in Latin America : Lessons from the 1990s
title_sort	currency substitution in latin america : lessons from the 1990s
publisher	World Bank, Washington, DC
publishDate	2014
url	http://documents.worldbank.org/curated/en/2000/05/437673/currency-substitution-latin-america-lessons-1990s http://hdl.handle.net/10986/18845
_version_	1764441609946005504

Currency Substitution in Latin America : Lessons from the 1990s

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