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.