Exchange Rate Policy and Liability Dollarization: An Empirical Study

The paper identifies the contemporaneous relationship between the exchange rate policy and external debt dollarization in a panel of industrial and developing countries. The presence of endogeneity makes the task of empirical identification elusive. The paper uses the method of "identification...

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Bibliographic Details
Published in:Policy File 2007
Main Authors: Berkmen, Pelin, Cavallo, Eduardo E
Format: Report
Language:English
Subjects:
Banking/Finance
International Monetary Fund
International/Economic development
Online Access:Request full text
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Summary:The paper identifies the contemporaneous relationship between the exchange rate policy and external debt dollarization in a panel of industrial and developing countries. The presence of endogeneity makes the task of empirical identification elusive. The paper uses the method of "identification through heteroskedasticity" developed by Rigobon (2003) to solve the problem of identification in the present context. It finds that, controlling for endogeneity, countries with aggregate liability dollarization tend to be more actively involved in exchange rate stabilization operations, but it finds mixed results for the reverse causality.