Portfolio Theory and Currency Substitution

This paper explores sources of deposit dollarization unrelated to standard moral hazard arguments. We develop a model in which banks choose the optimal currency composition of their liabilities. We argue that the equal treatment of peso and dollar claims in the event of bank default can induce banks to attract dollar deposits above the socially desirable level.The distortion arises because dollar deposits are the only source of default risk in the model, but dollar depositors share the burden of the default with peso depositors. The incentive to dollarize is reinforced by common banking system safety nets such as deposit and bank insurance. Our findings suggest that regulators in bi-currency economies would potentially benefit by departing from the currency-blind benchmark and differentiating among currencies in a way that prevents undesirable currency mismatches.

Section: Introductionmentioning

confidence: 65%

Section: B Bank Insurancementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Endogenous Deposit Dollarization

Broda

Levy-Yeyati

2003

“…and currency substitutability (see Thomas (1985), Kamas (1986), and Giovannini and Turtelboom (1993)). Specifically, there are two possibilities:…”

Section: Asset Vs Currency Substitutionmentioning

confidence: 99%

Another Look at the Transactions Demand for Money in Nigeria

Teriba¹

2002

The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that:• a full bibliographic reference is made to the original source• a link is made to the metadata record in Durham E-Theses• the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full Durham E-Theses policy for further details.Academic Support Oce, Durham University, University Oce, Old Elvet, Durham DH1 3HP e-mail: e-theses.admin@dur.ac. ABSTRACTThis study sets out to model non-bank public's desired holdings of five different measures of money in the Nigerian economy. These are currency outside banks (COB), demand deposits (DD), narrow money (Ml), quasi money (QM), and broad money (M2).The study addresses many of the pitfalls inv Table 3.4: Scale variables 57 Table 3.4: Deflators 58 Table 3.5: Real monetary aggregates 60 Table 3.6: Interest rates and Spreads 61 Table 4.1: Selected Macroeconomic Indicators 69 Table 4.2: Summary statistics for long rate, short rate and spread 72 Table 4.3: Summary statistics for selected macroeconomic variables 73 Table 4.4a: Predicting GDP growth with spread 76 Table 4.4b: Predicting GDP growth with combined model 76 Table 4.5a: Predicting domestic absorption growth with spread 77 Table 4.5b: Predicting domestic absorption growth with combined model 78 Table 4.6a: Predicting manufacturing growth with spread 78 Table 4.6b: Predicting manufacturing growth with combined model 79 Table 4.7a: Predicting industrial output growth with spread 79 Table 4.7b: Predicting industrial output growth with combined model 79 Table 4.8a: Predicting gross capital formation growth with spread 80 Table 4.8b: Predicting gross capital formation with combined model 80 Table 4.9a: Predicting private consumption growth with spread 81 Table 4.9b: Predicting private consumption with combined model 81 Table 4.10: Out-of-sample forecasting performance of the spread 84 Table 5.1a: Specification Searches for Ml: GDP as Scale Variable 91 Table 5.1b: Specification Searches for Ml: Domestic Absorption as Scale Variable 95 Table 5.2: Granger Causality test for the Ml Cointegrating Vector 98 Table 5.3a: Selecting the order of the variable model 100 Table 5.3b: Deterministic components in the cointegrating relations 100 Table 5.4b: Associated long run coefficients of Ml models 106 Table 5.5a: Summary of the findings of Gerrard and Godfrey 107 Table 5.6a: Error correction models for Ml 109 Table 5.7a: Summary statistics for two congruent models 111 Table 5.7b: Choice criteria for the two Ml models 112 10 COPYRIGHTThe copyright of this thesis rests with the author. No quotation from it should be published without his prior written consent, and information derived from it should be suitably acknowledged. will merely be identified. We will leave the detailed modelli...

“…The classical optimization model (Thomas, 1985) implies that the ratio of domestic to foreign money is negatively related to the domestic nominal interest rate and positively to the foreign nominal interest rate.…”

Section: Introductionmentioning

confidence: 99%

Dollarization in Transition Economies: New Evidence from Georgia

Aslanidi

2008

This paper provides new evidence for dollarization in Georgia during the period from 1996 to 2007 using implications of dynamic money-in-utility-function models. Partial e¤ects of foreign and domestic in ‡ation, exchange rate, and foreign and domestic currency deposits'interest rates on dollarization are considered. The US dollar is a strong substitute for domestic currency and has a signi…cant share in producing domestic liquidity services. The actual dollarization in Georgia is well explained by the exchange rate partial e¤ects model.