Dollar-Denominated Accounts in Latin America During the 1990s

By Pere Gomis-Porqueras, Carlos Serrano, and Alejandro Somuano*

 Abstract In this paper we analyze the evolution of dollar-denominated accounts in Latin America and how they impact the stability of the banking system and the volatility of macroeconomic aggregates. Our findings reveal that dollar deposits are strongly influenced by depreciation expectations of the local currency even in an environment of fairly low inflation. We also find that having more dollar accounts increases the probability of future crises if the economy is already in a crisis. Finally, our findings suggest that for some macroeconomic aggregates there exists a positive correlation, in the long and short run, between their volatility and the volume of dollardenominated accounts in the banking system. (JEL E31, E44)  

  The Dollar in Latin America During the past three decades, the dollar has increased its presence in most Latin American countries. The process began in the early 1970s, fueled by financial reforms. As capital and foreign exchange controls were lifted, the U.S. dollar began to gradually replace local currencies in the domestic citizens' portfolio. In several countries the observed pattern has been as follows.   The dollar has first been used as a store of value as residents maintained increasing portions of their wealth in dollar-denominated assets in order to avoid possible losses caused by macroeconomic instabilities. The dollar has then been used as a unit of account, mainly in the real estate sector, where prices have increasingly been quoted in dollars as a way to differentiate between changes in relative prices and changes in overall inflation. And finally the dollar has been used as medium of exchange.1   In some countries, like Brazil, Chile, and Venezuela, dollar-denominated accounts have not been used extensively. In others, such as Bolivia and Uruguay, dollar-denominated deposits have been a very important component of monetary aggregates. Finally, Panama and, more recently, Ecuador have adopted the dollar as legal tender, replacing completely the domestic currency.   While there is a good theoretical understanding of the implications of having two monies, the empirical consequences are still an open issue. 2 It is commonly believed that allowing foreign currency deposits to coexist with domestic-denominated accounts may provide the opportunity for greater domestic intermediation, promote financial sophistication by increasing the number of ____________   * Pere Gomis-Porqueras, Department of Economics, University of Miami, Coral Gables FI 33124-6550, gomis@miami.edu; Carlos Serrano, Sociedad Hipoetcaria Federal de Mexico,Av. Ejereito Nacional 180, Col. Anzeres C.P. 11590 Mexico D.F., asomuano@shf.gob.mx; Alejandro Somuano, Sociedad Hipoetcaria Federal de Mexico, Av. Ejercito Nacional 180, Col. Anzeres C.P. 11590 Mexico D.F., cserrano@shf.gob.mx. The views expressed in this paper do not necessarily reflect the views of the Sociedad Hipoetcaria Federal de Mexico. The authors would like to thank Bruce Smith, Scott Freeman, Alex Minicozzi, Li Gan, Subal Kumbhakar, Gil Mehrez, Mafia Soledad Martinez-Peria, Keisuke Hirano, the participants of the University of Mississippi, Barcelona, and Texas at Austin seminar series and an anonymous referee for useful comments. The authors would like to dedicate this paper to the memory of Bruce Smith.   I For an excellent overview see Savastano (1992).   2 Chang (1994) explores the relationship between currency substitution and inflationary finance in an overlapping generations model in which currency substitution is an endogenous equilibrium outcome. Chang (1994) shows that currency substitution may be a purely expectational phenomenon. On the other hand, Agenor and Khan (1996) investigate currency substitution in a dynamic, forward-looking model, where the actual currency holding is determined in a multiperiod cost-of-adjustment process. Similarly, Uribe (1997) employs a cash-in-advance model in which domestic currency is always in circulation and there is a reduction in the cost of using foreign currency as it is used in the economy.   Ver PDF completo: dollar-accounts