FINANCIAL DOLLARIZATION: Evaluating the consequences

Abstract

Financial dollarization has been placed at the forefront of the policy debate in many developing economies, for reasons that include its influence on inflation performance and, most prominently, the currency imbalance and associated financial fragility that it introduces for the economy as a whole. This paper contributes to this debate by revisiting the evidence on the impact of FD on inflation, financial fragility and economic performance in light of a new updated database. It finds evidence that financially dollarized economies tend to display higher inflation rates, higher propensity to suffer banking crises and slower and more volatile output growth, without significant gains in terms of domestic financial depthdollarization