De Nicol6, Honohan, and Ize assess the benefits and * Dollarization is likely to promote financial risks associated with dollarization of the banking system.deepening only in a high inflation environment. The authors provide novel empirical evidence on the * Financial instability is likely higher in dollarized determinants of dollarization, its role in promoting economies. financial development, and on whether dollarization isThe authors discuss the implications of these findings associated with financial instability. They find that:for financial sector and monetary policies. * The credibility of macroeconomic policy and the quality of institutions are both key determinants of crosscountry variations in dollarization.This paper-a joint product of Finance, Development Research Group, and the Monetary and Financial Systems Department, International Monetary Fund-is part of a larger effort to examine institutional determinants of financial development and stability. Copies of the paper are available free from the World Bank,
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