Systemic Risk, Dollarization, and Interest Rates in Emerging Markets

This study investigates the impact of systemic risks and financial dollarization on real interest rates in emerging economies. Higher systemic risks induce both higher real interest rates and increased dollarization. Using appropriate instruments for the dollarization ratio, the study overcomes the...

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Main Authors:	Bacha, Edmar L., Holland, Márcio, Gonçalves, Fernando M.
Format:	Journal Article
Published:	World Bank 2012
Subjects:	asset management bonds contract enforcement currency currency mismatches default risk emerging economies emerging markets exchange rate interest rate interest rates international bank international market issuance levy macroeconomic risks market failures real interest real interest rate real interest rates
Online Access:	http://hdl.handle.net/10986/4496

id	okr-10986-4496
recordtype	oai_dc
spelling	okr-10986-44962021-04-23T14:02:18Z Systemic Risk, Dollarization, and Interest Rates in Emerging Markets Bacha, Edmar L. Holland, Márcio Gonçalves, Fernando M. asset management bonds contract enforcement currency currency mismatches default risk emerging economies emerging markets exchange rate interest rate interest rates international bank international market issuance levy macroeconomic risks market failures real interest real interest rate real interest rates This study investigates the impact of systemic risks and financial dollarization on real interest rates in emerging economies. Higher systemic risks induce both higher real interest rates and increased dollarization. Using appropriate instruments for the dollarization ratio, the study overcomes the simultaneous equation problem and correctly estimates a negative coefficient for the dollarization ratio in the interest rate equation. It confirms the theoretical prediction that a strategy of "dedollarizing" the economy will raise the equilibrium domestic real interest rate if the strategy fails to address fundamental macroeconomic risks. Even so, it also finds that this effect is small, after controlling for the risks of dilution and default. The results bring to light the systemic-risk reasons for high interest rates in emerging economies—and contribute to evaluating the difficulties of dedollarization policies. 2012-03-30T07:12:37Z 2012-03-30T07:12:37Z 2009-02-28 Journal Article World Bank Economic Review 1564-698X http://hdl.handle.net/10986/4496 CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank World Bank Journal Article Europe and Central Asia Latin America & Caribbean Brazil China
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
topic	asset management bonds contract enforcement currency currency mismatches default risk emerging economies emerging markets exchange rate interest rate interest rates international bank international market issuance levy macroeconomic risks market failures real interest real interest rate real interest rates
spellingShingle	asset management bonds contract enforcement currency currency mismatches default risk emerging economies emerging markets exchange rate interest rate interest rates international bank international market issuance levy macroeconomic risks market failures real interest real interest rate real interest rates Bacha, Edmar L. Holland, Márcio Gonçalves, Fernando M. Systemic Risk, Dollarization, and Interest Rates in Emerging Markets
geographic_facet	Europe and Central Asia Latin America & Caribbean Brazil China
description	This study investigates the impact of systemic risks and financial dollarization on real interest rates in emerging economies. Higher systemic risks induce both higher real interest rates and increased dollarization. Using appropriate instruments for the dollarization ratio, the study overcomes the simultaneous equation problem and correctly estimates a negative coefficient for the dollarization ratio in the interest rate equation. It confirms the theoretical prediction that a strategy of "dedollarizing" the economy will raise the equilibrium domestic real interest rate if the strategy fails to address fundamental macroeconomic risks. Even so, it also finds that this effect is small, after controlling for the risks of dilution and default. The results bring to light the systemic-risk reasons for high interest rates in emerging economies—and contribute to evaluating the difficulties of dedollarization policies.
format	Journal Article
author	Bacha, Edmar L. Holland, Márcio Gonçalves, Fernando M.
author_facet	Bacha, Edmar L. Holland, Márcio Gonçalves, Fernando M.
author_sort	Bacha, Edmar L.
title	Systemic Risk, Dollarization, and Interest Rates in Emerging Markets
title_short	Systemic Risk, Dollarization, and Interest Rates in Emerging Markets
title_full	Systemic Risk, Dollarization, and Interest Rates in Emerging Markets
title_fullStr	Systemic Risk, Dollarization, and Interest Rates in Emerging Markets
title_full_unstemmed	Systemic Risk, Dollarization, and Interest Rates in Emerging Markets
title_sort	systemic risk, dollarization, and interest rates in emerging markets
publisher	World Bank
publishDate	2012
url	http://hdl.handle.net/10986/4496
_version_	1764391617909751808

Systemic Risk, Dollarization, and Interest Rates in Emerging Markets

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