Systemic Risk, Dollarization, and Interest Rates in Emerging Markets

Bacha, Edmar L.; Holland, Márcio; Gonçalves, Fernando M.

dc.creator	Bacha, Edmar L.
dc.creator	Holland, Márcio
dc.creator	Gonçalves, Fernando M.
dc.date	2012-03-30T07:12:37Z
dc.date	2012-03-30T07:12:37Z
dc.date	2009-02-28
dc.date.accessioned	2023-02-18T19:41:26Z
dc.date.available	2023-02-18T19:41:26Z
dc.identifier	World Bank Economic Review
dc.identifier	1564-698X
dc.identifier	http://hdl.handle.net/10986/4496
dc.identifier.uri	http://localhost:8080/xmlui/handle/CUHPOERS/249981
dc.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.
dc.publisher	World Bank
dc.rights	CC BY-NC-ND 3.0 IGO
dc.rights	http://creativecommons.org/licenses/by-nc-nd/3.0/igo
dc.rights	World Bank
dc.subject	asset management
dc.subject	bonds
dc.subject	contract enforcement
dc.subject	currency
dc.subject	currency mismatches
dc.subject	default risk
dc.subject	emerging economies
dc.subject	emerging markets
dc.subject	exchange rate
dc.subject	interest rate
dc.subject	interest rates
dc.subject	international bank
dc.subject	international market
dc.subject	issuance
dc.subject	levy
dc.subject	macroeconomic risks
dc.subject	market failures
dc.subject	real interest
dc.subject	real interest rate
dc.subject	real interest rates
dc.title	Systemic Risk, Dollarization, and Interest Rates in Emerging Markets
dc.type	Journal Article
dc.type	Journal Article
dc.coverage	Europe and Central Asia
dc.coverage	Latin America & Caribbean
dc.coverage	Brazil
dc.coverage	China