Dollar Deposits Research Articles

Endogenous Deposit Dollarization

This paper explores sources of deposit dollarization unrelated to standard moral hazard arguments. We develop a model in which banks choose the optimal currency composition of their liabilities. We argue that the equal treatment of peso and dollar claims in the event of bank default can induce banks to attract dollar deposits above the socially desirable level. The distortion arises because dollar deposits are the only source of fault risk in the model, but dollar depositors share the burden of the default with peso depositors. The incentive to dollarize is reinforced by common banking system safety nets such as deposit and bank insurance. Our findings suggest that regulators in bi-currency economies would potentially benefit by departing from the currency-blind benchmark and differentiating among currencies in a way that prevents undesirable currency mismatches.

Endogenous Deposit Dollarization

This paper explores sources of deposit dollarization unrelated to standard moral hazard arguments.We argue that the equal treatment of peso and dollar claims on a bank in the event of default can induce banks to attract dollar deposits above the socially desirable level. The distortion arises because dollar depositors are the only source of default risk in the model, but they share the burden of the default with peso depositors as interest rates cannot be set contingent to the (unobserved) level of deposit dollarization. The incentive to dollarize is reinforced by common banking system safety nets such as deposit and bank insurance. Our findings suggest that regulators in bi-currency economies should depart from the currency-blind benchmark and instead distinguish across currencies in a way that prevents undesirable currency mismatches, even in the absence of moral hazard related to the relaxation of market discipline.

Managing Systemic Liquidity Risk in Financially Dollarized Economy

This paper evaluates ways to protect highly dollarized banking systems from systemic liquidity runs (such as the ones that took place recently in Argentina, Uruguay, and Paraguay). In view of the limitations of available (private or official) insurance schemes, and the distortions introduced by central bank lending of last resort (LOLR), the authors favor decentralized liquid foreign asset requirements on dollar deposits, supplemented by a scheme of 'circuit breakers'. The latter combines the use of limited dollar liquidity to ensure the convertibility of transactional deposits with a mechanism that automatically limits the convertibility of dollar term deposits once triggered by a predetermined decline in banks' liquidity.

Dollar-denominated accounts in Latin America during the 1990s

In this paper we analyze the evolution of dollar-denominated accounts in Latin America, and how they impact the stability of the banking system and the volatility of macroeconomic aggregates. Our findings reveal that dollar deposits are strongly influenced by depreciation expectations of the local currency even in an environment of fairly low inflation. We also find that having more dollar accounts increases the probability of future crises if the economy is already in a crisis. Finally, our findings suggest that for some macroeconomic aggregates there exists a positive correlation, in the long and short run, between their volatility and the volume of dollar-denominated accounts in the banking system.

Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Currency Mismatches in Bank Intermediation?

Abstract The dollarization of bank deposits and credit is widespread in developing countries, resulting in varying degrees of currency mismatches in domestic financial intermediation. It is argued that flexible exchange rate regimes generally encourage banks to match dollar-denominated liabilities with a corresponding amount of dollar-denominated assets. Does this argument apply to the behavior of dollar deposits and credits in financially dollarized economies? A new database on deposit and credit dollarization in developing and transition countries is assembled and used to address this question. Empirical results suggest that, if anything, floating regimes are positively associated with deposit dollarization more strongly than they are associated with credit dollarization. As a consequence, currency mismatches in domestic financial intermediation seem to be greater under floating regimes.

Managing Systemic Liquidity Risk in Financially Dollarized Economies

This paper evaluates ways to protect highly dollarized banking systems from systemic liquidity runs (such as the ones that took place recently in Argentina, Uruguay, and Paraguay). In view of the limitations of available (private or official) insurance schemes, and the distortions introduced by central bank lending of last resort (LOLR), the authors favor decentralized liquid foreign asset requirements on dollar deposits, supplemented by a scheme of circuit breakers. The latter combines the use of limited dollar liquidity to ensure the convertibility of transactional deposits with a mechanism that automatically limits the convertibility of dollar term deposits once triggered by a predetermined decline in banks' liquidity.

Dollarization in post-hyperinflationary Argentina

This paper analyzes the continued dollarization of the Argentine economy, which experienced a rapid decline in inflation following its hyperinflations of the 1980s. First, a measure of dollar currency circulating in Argentina is developed, thereby improving upon previous studies of dollarization and currency substitution that focused on dollar deposit holdings only. Second, cointegration analysis of peso money demand in Argentina finds a negative ‘ratchet effect’ from inflation. The reduction in peso money demand attributable to the ratchet mirrors the estimated stock of all dollar assets held domestically by Argentine residents, consistent with the hypothesis of irreversible dollarization.

Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Bank Currency Mismatches?

The dollarization of bank deposits and credit is widespread in developing countries,resulting in varying degrees of currency mismatches in domestic financial intermediation, which in turn may accentuate balance sheet problems and thus financial fragility. It is widely argued that flexible exchange rate regimes encourage banks to match dollar-denominated liabilities with a corresponding amount of dollar-denominated assets, ameliorating currency mismatches. Does the behavior of dollar deposits and credit in financially dollarized economies support that presumption? A new database on deposit and credit dollarization in developing and transition countries is assembled and used to address this question. Empirical results suggest that, if anything, floating regimes seem to exacerbate, rather than ameliorate, currency mismatches in domestic financial intermediation, as those regimes seem to encourage deposit dollarization more strongly than they encourage matching via credit dollarization.

Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Bank Currency Mismatches?

The dollarization of bank deposits and credit is widespread in developing countries, resulting in varying degrees of currency mismatches in domestic financial intermediation, which in turn might accentuate bank balance sheet fragility. It is widely argued that flexible exchange rate regimes encourage banks to match dollar-denominated liabilities with a corresponding amount of dollar-denominated assets, ameliorating currency mismatches. Does the behavior of dollar deposits and credit in financially dollarized economies support that presumption? A new database on deposit and credit dollarization in developing and transition countries is assembled and used to address this question. Empirical results suggest that, if anything, floating regimes seem to exacerbate, rather than ameliorate, currency mismatches in domestic financial intermediation, as those regimes seem to encourage deposit dollarization more strongly than they encourage matching via credit dollarization.

Variation in the real exchange rate as a source of currency substitution

This paper presents a ‘shopping cost’ money service model in which it is shown that the real exchange rate influences the desired ratio of domestic-to-foreign-currency bank deposits. Empirically, it is found that if the real exchange rate value of the Canadian dollar falls then US dollar deposits of Canadians rise relative to Canadian M2. This relationship is found to be cointegrated. Dynamic adjustment analyzed using an error correction model indicates a cyclical adjustment. The results provide evidence that variation in the real exchange rate is a source of currency substitution and reinforces the argument that demand side factors influence the money stock. (JEL E41).

Dollarization in Argentina

Argentina became highly "dollarized" during its hyperinflations of 1989 and early 1990. Although inflation has returned to very low rates, a high degree of dollarization has persisted during the early 1990s, counter to what the currency substitution hypothesis predicts. This paper provides new evidence that explains the continued dollarization of the Argentine economy.First, we develop a new measure of dollar currency circulating in foreign countries. This measure improves our ability to analyze dollarization and currency substitution by distinguishing between dollar currency holdings and dollar deposits, and thereby represents an important advance over previous studies that focused on dollar deposit holdings only. Empirically, these components of dollar assets for Argentina have responded differently to recent macroeconomic shocks.Second, cointegration analysis of peso money demand in Argentina finds a negative "ratchet effect" from inflation on the demand for pesos. The reduction in peso money demand attributable to the ratchet effect is similar in magnitude to the estimated stock of all dollar assets held domestically by Argentine residents, consistent with the hypothesis of irreversible dollarization.

Money and Credit Under Currency Substitution

This paper examines the effects of a repatriation of foreign assets in an economy subject to currency substitution. In the absence of 100 percent reserve requirements, a change in the location of deposits that is not compensated by an increase in money demand induces a credit boom that works itself out through a transitory current account deficit and real currency appreciation. These results are illustrated with data from recent experiences in Argentina and Peru, where local banks have been authorized to capture dollar deposits from residents.

Currency Substitution: The Recent Experience of Bolivia

This paper analyzes the determinants of currency substitution in Bolivia in the period following the 1984/85 hyperinflation. We find that expected exchange rate depreciation and actual interest rate differentials between boliviano and dollar deposits in the Bolivian banking system are statistically significant determinants of the degree of currency substitution. However, the explanatory power of these variables is low compared to variables that measure the degree of inertia in the currency substitution process. Thus, further reductions in inflation or higher interest rates for boliviano bank deposits are likely to have but a small effect on dollarization.

Currency Substitution: The Recent Experience of Bolivia

This paper analyzes the determinants of currency substitution in Bolivia in the period following the 1984/85 hyperinflation. We find that expected exchange rate depreciation and actual interest rate differentials between boliviano and dollar deposits in the Bolivian banking system are statistically significant determinants of the degree of currency substitution. However, the explanatory power of these variables is low compared to variables that measure the degree of inertia in the currency substitution process. Thus, further reductions in inflation or higher interest rates for boliviano bank deposits are likely to have but a small effect on dollarization.

Money and Credit Under Currency Substitution

This paper examines the effects on the supply of money and credit of a repatriation of foreign assets in an economy subject to currency substitution. In the absence of 100 percent reserve requirements, such a change in the location of deposits, which is not compensated by an increase in money demand, induces a credit boom that works itself out through a transitory current account deficit and real currency appreciation. These results are illustrated with data from the recent experience in Argentina and Peru where local banks have been authorized to capture dollar deposits from residents.

A multi-billion dollar gold deposit in Greenland?

A multi-billion dollar gold deposit in Greenland?

Hegemons, IOs, and markets: the case of the substitution account

For eighteen months between 1978 and 1980, the International Monetary Fund and IMF members attempted to reform the international monetary system by establishing a substitution account. Designed to enhance the stability of the monetary system, the proposed substitution account would have accepted dollar deposits from foreign central banks, in return issuing certificates denominated in special drawing rights. The collapse of negotiations about the account in early 1980 confirms the hypothesis of hegemonic stability theorists that the distribution of systemic costs is problematic in the absence of a hegemonic power. The case thereby qualifies recent assertions that a small group of nations can supply stability to the international economy. However, two factors outside the realm of hegemonic theory also helped produce the outcome of the negotiations: the division of power within the United States between Congress and the Executive, and changes in international market conditions during 1979 and early 1980.

Eurodollars to the Rescue

A MERICAN dealings in international finance in the past decade are generally considered to add up to a narrowly-avoided isaster. Spending more abroad than we have taken in, we have been forced to make up the difference by paying out our gold and by going heavily into debt to foreigners. Fear lies heavy on the financial community that the dollar may come tumbling down, bringing the whole international monetary system with it. Already foreigners have three times as much in liquid claims against us as we have gold to pay, and the gap grows larger as our adverse balance of payments continues. There are many who wonder why catastrophe has not already overwhelmed us in the form of a run on our gold by fearful foreign creditors. Yet we have not been crushed, and if we look in the right direction we can detect the light breaking through the threatening clouds of monetary gloom. Why has there been no rush from foreigners to cash in their claims for gold while it is still available? One answer lies in an unexpected quarter, in the recentlydeveloped Eurodollar system. Foreigners use dollar balances in the United States as a sort of super-currency which is borrowed and lent among themselves and which is often lent to Americans. All this activity has been vastly lucrative to holders of dollar balances, and there have been other benefits as well. So why should foreigners give up the interest income and convenient financing of Eurodollars for sterile gold which yields no income and requires expensive safekeeping? The answer has been clear: foreigners prefer to hold on to their dollar balances in the United States as the basis of the Eurodollar system. Eurodollars are dollars deposited in foreign banks. This is possible because bankers abroad keep accounts in all kinds of money. There are Europounds and Eurofrancs as well as Eurodollars, all part of a wider system known as Eurocurrencies. Eurodollars, however, are by far the largest and most active part of the system. Eurodollars come into being as deposits by some person, company or government that has a claim on a dollar balance in the United States. The claim is transferred to the foreign (usually London) bank by the act of deposit. The commitment in most cases is a time deposit on which the bank pays interest to the depositor. The bank must earn revenue in order to pay this interest so it lends the dollar to someone else at higher interest rate than it pays, earning a fee in the process. Depositors may be Americans seeking safety in Swiss bank accounts. Or they may be Europeans who have received dollars from American tourists or importers. Even central banks and the Bank for International Settlements have deposited dollars in London or other European banks when there were not enough dollars otherwise to keep the Eurodollar game going. One fact stands out: there have been an increasing volume of dollar deposits from a wide variety of sources to supply Eurodollars. Borrowers may be American banks who need funds for their operations at home. Eurodollars are dollars; to an American bank they look just like other dollars and can be used to restore required reserves at the Federal Reserve banks or to lend to American business. A substantial portion of Eurodollar loans are made by foreign branches of U. S. banks to their home offices. Foreign subsidiaries of U. S. industrial corporations have been large borrowers of Eurodollars, as have foreign banks and even foreign governments. One might ask why all the trouble to use Eurodollars when borrowers might go direct to American banks and borrow dollars. One answer is that the American banks may not have enough dollars to lend, and what little they LEONARD W. ASCHER is Professor of Finance at the University of Hawaii. He is the author of Survey of Accounting, a textbook published in 1951, and has been a frequent contributor to the Financial Analysts Journal.

New manganese deposit

The discovery of a multi‐million dollar deposit of manganese on the floor of Green Bay, Lake Michigan, was announced by Professor J. Robert Moore, a University of Wisconsin oceanographer. Pellets composed of manganese (2–17%), iron, and other elements were found in July by Professor Moore and a crew of graduate students during routine bottom sampling. Moore estimates that there are between 180 and 200 square miles in which concentrations of the deposit are sufficiently high to make mining practical, when techniques are perfected to guard against further pollution and ecological imbalance in the bay. It is also significant that the manganese is in pellet form, which makes the cost of recovery and processing economically feasible.

The Balance of Payments: A Political and Administrative View

M Y working view of the balance of payments, a reasonably commonplace one, places it on three levels. At the bottom and most basic for policy is the net balance of goods and services. This yielded a surplus of $3.8 billions in 1960, $5.4 billions in 1961 and $4.8 billions in 1962, the result of a merchandise surplus of roughly the same size and a (net) investment income which had reached $3.3 billions in 1962. Against this were military expenses (amounting to $3.1 billions in 1962), net travel outlays (amounting to about a billion in 1962) and a variety of other payments and remittances including United States Government grants of nearly $2 billions. Preliminary figures for 1963 show an improvement in the net balance of about a billion dollars, the result of further increases in investment income, a modestly larger increase in exports than in imports and a slight decline in military spending.' At the next level are the long-term private capital outflows ($2.8 billions net in 1962) and government loans (amounting net to $1.5 billions in 1962). This outflow creates a corresponding claim by Americans on overseas resources and portends a possible later improvement in the payments balance as the result of interest, dividends and repatriated earnings. These items were evidently about the same in total in 1963 as 1962. But this was as the result of a sharp curtailment of private capital outflow in the second half of the year following a very large increase in the first half. Long-term outflows are continuing at a low level as this is written in early 1964. In 1962 all the foregoing transactions the so-called basic balance involved a deficit of $2.1 billions. There has been a deficit in this account in every year since 1947. At its highest in 1959 it amounted to $4.7 billions.2 In late 1963 and early 1964, the movement in this deficit was sharply down. The third level is ultimately derivative from the foregoing. Dollar claims accumulate as the result of the foregoing commercial transactions and capital movements. They can be held in the form of dollar deposits or converted into foreign currencies or gold. In the main they have been held in dollars and thus the large accumulation of current dollar claims in recent years -from around $7 billions in 1950 to some $25 billions at present. But some $7 billions has been converted to gold and removed from the monetary gold stock in the last six years. This has been the most visible and publicized aspect of the balance of payments problem and also the one that is most purely a consequence, rather than a cause, of changes at the other levels. Few public problems can ever have been so ingeniously contrived to maximize difficulty as that of the balance of payments. There has continued to be a question as to whether there is a problem. There has been a puzzling choice between real and spurious solutions. And each of the real solutions has been protected by a stout framework of vested ideological and economic interest reinforced, in some cases, by distinctly non-secular conviction. The sources of difficulty may be dealt with under the following heads: (1) The question as to whether there is a problem; 'In the last three years, apart from secondary discussions and memoranda, I have been concerned with the balance of payments problem on two major occasions. In 1961, during the first weeks of the new administration, I had general coordinating responsibility for the special message which was transmitted to the Congress in February, 1961. On my return from India in the summer of 1963, I was asked by President Kennedy to review the problem and report. This paper draws on this experience. But, as will be evident from the context, it does not reflect accepted policy and cannot be read as any indication thereof. Moreover it was, in some measure, my task in 1963 to consider ultimately rather than presently necessary action. 2 Data from Statistical Supplement to Survey of Current Business (1963), and Survey of Current Business (June, 1963), as used in The United States Balance of Payments in 1968, The Brookings Institution (Washington, D.C., 1963). Appendix Tables for 1963 from Economic Report of the President.