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Literature review demand money bolivia sample small business plan restaurant

Literature review demand money bolivia

Similarly, in the case of El Salvador, Calero et al. Their findings indicate that an increase in net remittance income increases the probability that young children are in school. However, they also find that increasing the number of absentee adults significantly reduces the probability of being in school for children of all ages. Similarly, Amuedo-Dorantes et al.

That is, the disruption caused by losing a household member to out-migration diminishes any benefits gained from receiving remittances. In addition to contributing to the body of research specific to Bolivia, this study also contributes to the broader literature pertaining to remittances and child labor. With the exception of Dimova et al. While this is indeed an important point, it may underestimate the full impact of remittances.

For instance, if we wish to curtail child labor so that children may attend school, then a significant reduction in the number of hours worked may have a larger impact than moving a child at the margins completely out of the labor force.

Similarly, Acosta and Alcaraz et al. This, too, may be misrepresenting the true impact of remittances, as remittance size can vary widely across households. Furthermore, from a policy standpoint, it is important to differentiate between the potential impacts of increasing the share of households receiving remittances i. This study addresses these issues by analyzing the relationship between the size of remittance income and the number of hours worked by children in the household, in addition to the relationship between remittance receipt and the prevalence of child labor.

The theoretical framework for this analysis builds off of the model proposed by Basu and Van , extended to include remittance income in the household budget constraint. The minimum subsistence level, s , is a parameter. For the case of the interior solution, comparative statics are given by Eqs. Equations 4 and 5 show child labor decreases with an increase in adult wages and remittance income.

However, remittance receipt is more complex than just a change in non-labor household income, since migration necessarily requires removing at least one member from the household to go abroad, i. Equation 6 gives the change in optimal child labor effort with respect to the number of adults in the household.

This implies that when the adult wage is less than the minimum subsistence level, migration will lead to a decrease in child labor and when the adult wage is greater than the minimum subsistence level migration leads to an increase in child labor, before accounting for any change in remittance income.

Combining this with the fact that child effort is decreasing in r means that in the case where adult wages are less than the subsistence level of consumption, migration and remittances unambiguously reduce child effort. That is, if remittances are insufficiently small, such that they do not offset the loss of the adult wage due to migration, then migration can increase child labor.

Intuitively, we would expect that a rational, utility maximizing household would not send a member abroad in this case unless they expected remittance income to offset the loss of domestic income. However, since the realized income may differ from the expected income, it is possible that migration may indeed lead to an increase in child labor effort. Thus, ex ante it is uncertain whether remittances will reduce child labor on average.

Equation 7 gives the change in child labor effort with respect to an increase in the number of children. That is, in households where the adult income exceeds subsistence, increasing the number of children increases child labor effort. While this may seem counterintuitive at first glance, recall from Eq. As such, the result form Eq. This would imply that although more children might necessitate an increase in child labor, this need can be offset by an increase in income.

Therefore, we can potentially expect to see both child labor and remittances increase with respect to the number of children in the household. Finally, Eq. Thus, when less labor is needed to meet the subsistence need, less labor is supplied. However, when adult surplus income exceeds the child subsistence level, child labor is increasing in child wages. Thus, children can be enticed back into the workforce by increasing the wage.

This study addresses two general empirical questions. First, are children in households that receive remittances more or less likely to work? Second, how does the size of the remittances received by the households affect the number of hours worked by children? The first question is addressed by estimating the effects of remittance receipt on child labor at the extensive margins.

That is, remittance receipt and labor supply are measured using indicator variables equal to one if the household receives any positive amount of remittance income and if the child worked at least 1 h in any labor activity. This approach is consistent with the previous literature which investigates how remittance receipt influences the propensity for children to work.

To address the second question, the effects are then estimated at the intensive margins, replacing the indicator variables used in the first model with measures of the total number of hours a child works and the amount of remittance income the household receives, both measured on a weekly basis.

Both models are estimated first on the entire sample. The models are also estimated separately for urban and rural households, as well as for male and female children in order to explore any potential heterogeneity between these groups. In both models, endogeneity is likely to lead to biased results.

To control for potential endogeneity issues, the models are estimated using an instrumental variables IV strategy. Given the nature of the model, finding an instrument that affects the size of remittances being sent without directly affecting the number of hours worked by children in the household can be challenging. The instrument chosen to predict the incidence and size of remittances received by the household is the existence of migration networks, which is an instrument commonly employed in the migration and remittance literature Alcala et al.

Migrant networks are useful instruments because such networks can reduce the costs of migration and improve employment opportunities in the destination countries. Thus, they can affect both the decision to migrate and the size of remittances being sent, without necessarily being correlated with the unobserved factors influencing labor supply decisions by the household receiving the remittances. It is expected that reduced costs of migration, as indicated by a larger migrant network, will lead to an increase in both the likelihood that a household receives remittances and the size of the remittances received.

Aggregate measures, such as share of households receiving remittances, are also useful as instruments because they are less susceptible to issues of reverse causality. On the other hand, aggregate measures do not allow for the possibility that the presence of migrant networks may affect households differently, depending on their ability to access them.

To account for this, an interaction term between remittance receipt at the department level and a household wealth index is also included. Inclusion of household wealth allows for the fact that international migration can be quite costly, so wealthier households will be in a better position to take advantage of the presence of migrant networks than poor households.

X is a vector of individual and household characteristics, and Z is a vector of instruments. Individual characteristics of the children include age and gender. In the first part of the analysis, both L ij and R j are indicators equal to one if the child works and the household receives remittances, such that. As Acosta points out, there are several methods available for analyzing models with binary endogenous and outcome variables.

There is also some debate on which of these methods is preferred. Angrist suggests that a two-stage least squares 2SLS linear probability model is sufficient if the intent is to identify causality. On the other hand, 2SLS also has a number of shortcomings with binary endogenous and outcome variables. First, predicted values in linear probability models are not bound within the unit interval.

Additionally, as Moffitt and Wooldridge indicate, neglecting to control for non-linearity in the first stage of the linear probability model can lead to inconsistent estimates in the second stage. Another method, which controls for nonlinearities, is the bivariate probit model developed by Heckman The bivariate probit model eliminates the problems associated with non-linearity in the two equations.

However, identification in the bivariate probit model requires stronger assumptions than 2SLS, most notably the exclusion restriction, which assumes that the instruments only affect the outcome variable via the treatment variable Angrist et al. Despite both models having strengths and weaknesses, Chiburis et al.

In the analysis below, both models are estimated. However, since these conditions outlined by Chiburis et al. In the second part of the analysis, the indicator variables for remittances and labor supply are replaced by the natural logs of the observed values plus one, such that Eqs. In addition to the endogeneity issues mentioned above, another source of potential bias in the second model comes from the fact that If a significant share of the observed zero values occurred due to unemployment, rather than choosing not to participate in the labor force, then this variable is censored at zero and OLS estimates of Eq.

Similarly, since only 8. In a single-equation model, this source of bias is typically corrected for with the use of a Tobit model Tobin Given that endogeneity is still an issue, the model is again estimated through the use of instrumental variables. A standard IV Tobit model, however, assumes an uncensored continuous variable in the first-stage regression. Thus, to control for censoring in both equations, the model is estimated using a bivariate Tobit model.

The bivariate Tobit model is not widely used in the economics literature, but it has been shown to be particularly useful in cases where the dependent variables may be jointly determined Yoo , Rahman , as is the case in the present study. The survey, conducted by the Bolivian National Statistics Institute Instituto Nacional de Estadistica de Bolivia , is a sample of 33, individuals living in households and is weighted to be nationally representative.

The survey covers a wide range of economic and demographic characteristics of the household and its members. Most importantly for this analysis, the survey documents the labor activity and income sources, including remittance income, of all household members over the age of 7.

For the purpose of this study, the analysis is restricted to include only children under the age of 14, which was the legal working age at the time of the survey. Footnote 3 The survey contains data on children between the ages of 7 and Table 2 presents summary statistics of selected key variables.

Labor activity is determined by a series of questions asking if they were employed, worked growing food or raising animals, helped with a family business, worked as a street vendor, or engaged in any other activity which earned money for at least 1 h in the previous week, or had a job, but did not work in the previous week because of vacation, illness, or other various reasons. Thus, the measure of labor activity used includes both employment in the formal and informal labor markets, as well as unpaid domestic labor, such as farming.

Footnote 4 The children who work reported working an average of These numbers vary widely between urban and rural households, however. In rural households, On the other hand, working children in urban households work more hours per week, on average, than working children in rural households, with the former reporting an average of Table 3 gives the distribution of child labor activity by type of work at the national level and by urban and rural households.

Nationwide, This is largely driven by the fact that child labor is much more prevalent in the rural areas, and agriculture makes up Agricultural work done by children includes preparing the land for planting, harvesting crops, tending to livestock, and other jobs typical to farming. The largest category of activity among urban children is sales jobs. Sales jobs can include being employed as a cashier, working in a family run store, or working as a street vendor.

The sales category excludes the sale of prepared food, which is included in the food service category. Food service also includes working at a food stand or restaurant in any capacity, whether it is in sales, cooking, or washing dishes. Food sales constitute This makes up 6. This type of work is not a significant component of rural labor activity.

Overall, 8. This is slightly higher among urban households 9. A similar pattern holds for size of remittances. Across the entire sample, children in remittance-receiving households are slightly less likely to work than children in households not receiving remittances, at This difference persists in urban households, but the propensity to work is very similar between the two groups in rural households. Remittance-receiving households tend to have higher incomes and are less likely to be below the poverty line.

The household heads are more likely to be female and less likely to be married. The household is also more likely to have higher levels of education and more likely to speak Spanish as their first language. These patterns are consistent between rural and urban households. Table 4 reports coefficient estimates of Eq.

Both coefficients for remittance receipt are positive, but not significant. Column 2 presents the results of the two-stage linear probability model. The remittance coefficient is negative and highly significant, indicating that OLS estimates are biased toward zero, which is consistent with results found by previous studies Acosta ; Alcaraz et al.

As noted above, an advantage of 2SLS is the ability to test for instrument validity. With a p value of 0. Furthermore, in Table 5 , column 1 presents the first-stage estimates of the 2SLS model. Both of the instruments are positive and highly significant.

This result is consistent with the hypotheses that reduced costs of migration, as measured by larger migrant networks, increase the probability that households receive remittances and that wealthier households are better positioned to leverage these networks. Additionally, propensity to receive remittances is significantly higher for households with female heads and increases with the age of the household head. Also, recall that the theoretical model above suggested that remittances may increase when there are more children present in the household.

The results in Table 5 indicate that households with more adolescent girls are more likely to receive remittances; however, the effect of an increase in adolescent boys or children under the age of 5 is not significant. Unfortunately, since expected values of dependent variables in linear probability models are not bounded between zero and one, the usefulness of the linear probability model can often be limited to addressing the direction of causality and testing instrument validity.

Thus, as mentioned above, the preferred model for this analysis is the bivariate probit model, the results of which are presented in column 4. Again, the coefficient for remittance receipt is negative and highly significant. In Table 5 , it can be seen that the signs and significance of the variables determining remittance receipt are consistent with those of the 2SLS model.

While the interpretation of coefficient estimates obtained by the bivariate probit model are not as straight forward as those obtained by 2SLS, estimates of causal treatment effects can be recovered using the predicted values Angrist et al. Average treatment effects ATE and the average treatment effect on the treated ATT for the bivariate probit models are estimated using the method proposed by Nichols The ATT is estimated as the mean difference in predicted probabilities conditional on the child living in a household that receives remittances.

The effects of remittance receipt corresponding to the results in Tables 4 and 5 are presented in the first row of Table 6. These results indicate that remittances receipt is expected to reduce the likelihood a child works by an average of There are also a number of other noteworthy results among the control variables in Tables 4.

As was seen in the summary statistics, children in rural households are significantly more likely to work than their urban counterparts, and boys are more likely to work than girls. Although Bolivia has 35 officially recognized languages Taylor , Spanish is the traditional language of the elite class and also the most common shared language between groups. As such, poor Spanish skills can lead to economic exclusion of the parents, thus increasing the need for children to help supplement income.

Furthermore, although the Education Reform Bill of called for education to be provided in indigenous languages, indigenous schools are typically of lower quality than Spanish language schools, thereby making the opportunity cost of work lower for indigenous children. This relationship between economic inclusion and education, and the propensity to work can be seen in other variables as well—the likelihood of working declines with the level of education in the household, as well as with household wealth.

Given that the results above indicate different propensities to work between rural and urban households, as well as between male and female children, the following section explores how remittances affect these groups differently.

Table 6 presents the estimated treatment effects of remittance receipt for urban and rural households and for male and female children obtained by estimating the bivariate probit model separately for each group complete estimation results are presented in Tables 7 and 8. Despite large differences in the propensity to work between boys and girls, the average treatment effects appear to be fairly similar. However, the treatment effect on the treated is substantially larger for females. Thus, it would appear that although boys are significantly more likely to work than girls, remittance income tends to be directed toward reducing the labor effort of girls.

Comparison of the treatment effects between urban and rural households yields many interesting results. First, the ATT is approximately 7 percentage points larger for urban households than rural households. It is not entirely surprising that remittances are more effective at reducing child labor in urban areas than rural areas.

First, children are significantly more likely to work in rural areas regardless of whether their household receives remittances. Finally, if child labor is determined by household labor demand rather than the need for income , labor market imperfections in rural areas can make hiring adult wage labor more difficult in rural areas, thus increasing the need to compensate with child labor. Additionally, the ATT for both groups are quite large relative to the observed share of children who report working.

This would imply that although the observed difference between the share of children working in households that receive remittances and those who do not is fairly small, under the counterfactual of no households receiving remittances, these differences would be much larger. Thus, the observed differences found in the summary statistics significantly underestimate the causal impact of remittances on reducing the prevalence of child labor.

In urban households, the effect on the treated is four times as large as the average treatment effect. This would suggest that urban households who opt to send migrants abroad benefit much more than the average household would, i.

One possible explanation might be a kinship effect that could exist in the rural areas. That is, if rural villages tend to be made up largely of extended families or close knit indigenous populations, then income and expenditure decisions might be made at the community level, rather than the household, and benefits from remittance income might be spread across the entire village.

Whereas in urban areas, the population may be more segmented and remittance income would remain contained among recipient households. Unfortunately, the current data does not contain information on inter-household relationships, so this hypothesis is not directly testable.

Table 9 presents coefficient estimates of Eq. Column 1 reports estimates of a simple Tobit model. The coefficient is negative, but not significant. Columns 2—4 report the results of instrumental variable models with various levels of control for censoring in the dependent variables. Columns 2 and 3 are presented for mainly expository purposes, while column 4 is the preferred specification. Column 2 presents the results of a 2SLS model.

The coefficient estimate for remittance income is negative and significant. However, since neither equation controls for censoring, these estimates are likely to be biased. The 2SLS model is presented primarily for the purpose of testing instrument validity. The p value of 0. Additionally, results of the first stage, presented in Table 10 , show that factors determining remittance size have the same relationship, in terms of sign and significance, as those determining the incidence of remittance receipt.

Column 3 presents results of the IV Tobit model. The coefficient is much larger than those presented in the 2SLS model, indicating that a strong upward bias occurs when censoring in the labor supply equation is not controlled for. However, the IV Tobit model does not account for censoring in the remittance receipt equation. Column 4 presents results from the bivariate Tobit model, which controls for censoring in both equations. This result highlights the fact that in addition to remittances being effective at moving some children completely out of the labor force, they can also help to reduce the burden of labor on others, thus potentially freeing more time to devote toward human capital accumulation.

Tables 11 and 12 presents estimates of the bivariate Tobit model for male and female children, as well as rural and urban households. There does not appear to be a large difference between the effects for male and female children. There does, however, appear to be a large difference between coefficient estimates for urban and rural households.

To put it another way, for a child working the mean number of hours per week, living in a household receiving the median amount of remittances, it would take a When viewed in this way, the marginal effect of a remitted boliviano is larger in rural areas.

Furthermore, this also suggests that remittances ability to reduce child labor may be diminishing as remittance income increases. Many of the other variables found to impact the labor supply decision at the extensive margins also carry through to the intensive margins. The move would be, at best, risky. Then, why not go to the other extreme, to strict inflation targeting?

We argue in the text that this solution is not realistic and probably riskier than full dollarization. Then, what is left? The tentative answer is a middle of the road solution, consisting of a gradual reduction of dollarization, through market-friendly mechanisms. Given the dramatic experience with forced de-dollarization in the early 's, any increased use of domestic currency has to be fully voluntary.

A difficult fine-tuning of policy measures and announcements needs to take place. Doubts on the integrity of the current bi-monetary arrangement, that heavily favors dollar holders, may scare depositors. Yet, given that the situation is of unstable equilibrium, changes of sufficient impact are required.

The problem is then of both timeliness and sequencing. The public has to perceive that there are gains in total welfare with a more independent monetary policy and a more flexible exchange rate. Yet, a full recognition has to be given to the fact that domestic currencies cannot easily compete in terms of quality and scope of services with solid, internationally accepted currencies.

The most important point is that de-dollarization requires a credible commitment to maintain inflation low, not only now but in the future, even the distant future. Actual and expected inflation have to be very low. The paper is organized as follows.

In section 2 we review the origins of dollarization, by highlighting the main economic developments of Bolivian history, and based on this case study, some conclusions are suggested. Section 3 is devoted to the examination of the alternative or rather, complementary hypothesis of the presence of a peso problem and of different volatilities between inflation and the RER.

Section 4 examines with more detail public policies, as a major factor behind dollarization. Section 5 highlights the diminished role of central banks in dollarized economies and how they stand with regard to the objectives set for modern central banking. In section 6 the issue of the benefits and costs of going either to full dollarization or to a fully flexible exchange rate the bipolar option is examined.

Section 7 proposes concluding remarks. The common thread in the dollarization of the economies, real and financial, is the legacy of distrust in their domestic currencies, because of prolonged periods of high and unstable inflations. The perception remains that the same forces that continuously led to the depreciation of exchange rates, also pushed prices up.

For a vast majority of the public, inflation and depreciation of the currency are synonymous. The origin of dollarization in Bolivia can be traced back to the abandonment of the convertibility to gold for domestic transactions in the early 's, and to the Chaco War against our neighbor Paraguay. The increasing dependence of Bolivia on foreign savings, either under the form of loans from the international development banks, or foreign direct investment was another factor. The loans were contracted in dollars and had to be serviced in the same currency; the same was true for profit remittances of the multinational companies.

This form of opening the economy to foreign capital became a major explanatory factor of dollarization. In the seventies, inflation increased again. Then wealthy Bolivians did not limit themselves to hoarding dollar bills and pricing big items, like houses and cars in dollars as they did before, and begun to open accounts off-shore.

To impede capital flight and to attract back the off-shore deposits of Bolivians, the government allowed banks in the mid seventies to offer time-deposits. They rapidly took off as Bolivians switched their domestic currency deposits to domestic dollar deposits. Also, some repatriation took place.

Deposit dollarization increased, and this was coincidental, and not independent of, a rapid accumulation of public external debt. By the mid's, payments, financial and real dollarization were already important. In November , after the international debt crisis had started, the government took the unwise and dramatic decision to de-dollarize all financial contracts, forcing moreover the conversion of dollarized assets to domestic currency-denominated assets, at an exchange rate lower than the free-market rate.

Simultaneously, it imposed foreign exchange controls. These decisions in the eve of accelerating inflation produced huge transfers of wealth and income from creditors to debtors. Private savings were wiped out and the financial system shrunk to a dismally small size.

The exchange controls led to a black market for dollars, with incredible high premia. Forced de-dollarization, in turn, sent underground the operations in dollars, that despite the prohibition continued on, frequently undertaken by the domestic banks themselves, that created off-shore branches to continue working in foreign currency.

The shrinking of financial intermediation had very negative consequences on real GDP. In addition to these visible real effects, the opposition parties blamed de-dollarization as a direct cause of the hyperinflation that afflicted Bolivia in This accusation cannot be justified on economic grounds, but we must acknowledge that de-dollarization caused high real costs. In addition, since de-dollarization affected the rich and the middle classes, their press and the opinion-makers related to them, as well as the opposition parties of that time, took due care of presenting de-dollarization itself, and not only the forced conversion of dollars to domestic currency at an unfair rate, as a confiscatory measure as indeed it was.

As important, the public resented not being allowed to operate freely with a trusted money or, in other words, not having an anchor. Afterwards, the slightest hint at de dollarization would evoke tremors in the population that translated into capital flight.

The hyperinflation was controlled by end with a drastic, orthodox, stabilization plan. Exchange rate unification was central to the success of the stabilization plan. The banking system and, beyond, the whole financial system, is now almost completely dollarized. It is observed in figure 1 that loan dollarization has a smoother trend than deposit dollarization, probably because banks financed part of their loans by borrowing abroad.

Also in , the crucial, but largely unnoticed, decision was taken to allow banks to settle their dollar positions in the books of the central bank. Re-dollarization returned after with a vengeance; no restriction, however small, to the right to possess dollarized assets and to move freely and at no cost between dollars and the domestic currency was politically admitted. Figure 1 Domestic dollarized deposits and loans as percent of total deposits and total loans August In the aftermath of the stabilization plan, when there was a dire need of international reserves, there were no minimum reserve requirements for dollar or dollar-indexed deposits.

Regulations on open foreign exchange positions were issued at the same time, but with ampie tolerance granted for positions of excess assets over liabilities in dollars. As a consequence of the actions taken, not only financial dollarization took off with great impulse, but a whole monetary system in dollars developed.

Claims in dollars were created inside Bolivia very extensively. Banks received deposits in dollars from residents in Bolivia and borrowed abroad, always in US currency. More important for our purposes, they on lent the dollars received, more often than not, to firms in the non-tradable sector and to households. On a closer look, the monetary system in local dollars is a "hard peg" system, with an irrevocable parity, except in the case of collapse.

The local dollars are backed with dollars held abroad as international reserves by the central bank and by the banks, and under the form of notes held in their vaults. The vision of a hard peg acquires further relevance when it is realized that only a fraction of the dollar denominated deposits is covered by the consolidated foreign exchange reserves of the central bank and of the banking system. The uncovered dollarized deposits are "local dollars" or "inside money".

Table 1 gives some estimates of the money multipliers. The narrow money multipliers m1 do not seem large; on the other hand the broad money multipliers m3 are indeed importan! Deposits in the Bolivian banking system exhibit a high degree of concentration, reflecting the very uneven distribution of income and wealth.

This concentration of wealth, income and deposits may be another explanatory factor of dollarization and the low demand for financial instruments indexed to prices. The financial savings of the rich are in dollars to protect their consumption leveis. In incipient banking systems like the Bolivian one, loans are frequently collaterized by real estate.

While real estate is a non tradable asset, it has however been priced in dollars for decades. So we can make the conjecture that this form of previous real dollarization paved the way for financial dollarization. The government developed a market for its domestic debt. Practically all government paper is issued in dollars, except for very short maturities.

Note that on the asset side of their balance sheet, banks have, by and large, credits lent to non-tradable sectors, collateralized with non-tradable assets, and government paper. Before proceeding, a short presentation of the current exchange regime is needed. The exchange rate regime, after the stabilization of , started as a managed float, with the auctioning of foreign exchange by the central bank in a Dutch auction with a reservation price, as the main and sole intervention mechanism.

Since the beginning of , two things happened:. The central bank could readjust the exchange rate by changing within short periods its reservation price. The stability of the RER is however subordinated to keeping domestic inflation low. This system, which is over 17 years oid, is sui generis but it has worked reasonably well. More important, the system enjoys high credibility. The current crawling peg system has reduced the volatility of the RER.

Both the level and the volatility of domestic inflation have also experienced a significant reduction. Over a long-term span, the variance of inflation has been larger than the variance of the RER, but somewhat surprisingly, the variance of the RER is larger than the variance of inflation in the more recent period. In the terms of the ILY model, the difference in volatility valid for long samples in Bolivia is behind the high degree of dollarization. The ILY model uses interest rate parity as a starting point but focuses on the hedging decisions against inflation and foreign exchange risk of depositors and borrowers.

The authors look at the second moments of the distribution of real yields in dollars and local currency. Portfolio equilibriae gravitate around interest rate parity and minimum variance allocations. The minimum variance portfolio allocations MPV provide a natural benchmark for actual allocations on both sides of a bank's balance sheet.

Thus, the explanation for financial dollarization must essentially be based on volatilities rather than levels. An interesting implication of the model is that deviations from MPV can be explained by a mismatch between the supply and demand of loanable funds; and public policies, like monetary policy, currency denomination of public domestic debt and of bank reserves in the central bank, and regulatory restrictions.

If the variance of the RER is smaller than the variance of inflation, this would explain "core" or underlying dollarization. This result is the more affecting, the more attention is paid by the authorities to the stability of the RER. What do the data tell us? In Appendix A, a very high underlying dollarization coefficient 0. This number is slightly lower than the estimate in ILY p. Our sub-sample In addition, between and , inflation was low, as was its variance.

There was real depreciation on average, but the variance of the RER was larger than the variance of inflation. The failure of MVP allocations to explain the increasing dollarization of the past few years send us back to our explanations based on the difficult predictability of the path of the RER. It can be conjectured, that around , a regime change occurred with the eruption of the regional crisis.

The MVP theory remains valid for more "normal" times. In addition, the results of the ILY model fit well when expectations on the exchange rate and inflation are both continuous and bounded. Yet without dismissing the model, I think that we have to focus more on the inherent difficulty to find the equivalence of returns on an ex-ante basis in, say, pesos and dollars.

Dollarization may arise from the market rational forecasts of discrete events, which drives to very high levels the spread between dollar and domestic currency interest rates, perceived conventionally as risk premia. The uncovered interest rate parity may not hold in the long run because the public assigns a positive probability even if small to its future collapse, although the exact timing is not known. The public continues anticipating a discrete change in the distribution of the economic determinants of the current exchange-rate regime that will lead to depreciation.

Figure 2 shows the evolution of the difference between the borrowing rates in dollars and domestic currency lagged 12 months and compares it with the actual currency depreciation. The monthly data show that in the period from January through July , except occasionally, the interest rate spread was above the depreciation rate.

From July on, when the depreciation rate speeded up, the relation was inverted. Moreover, because of a more rapid depreciation and of changes in the regulations on foreign exchange positions, the banks discouraged the constitution of remunerated deposits in domestic currency. The perceived funding costs by the banks were so high, that they refused local currency deposits. The easiest way to refuse them, without incurring in the displeasure of the authorities, was to offer ridiculous low interest rates to depositors, lower than the exchange rate depreciations.

Banks did not want to operate with local currency, except with costless sight deposits and very low cost savings passbooks. Figure 2 Exchange rates and interest rates spread. Even with the caveat given above, the econometric analysis of the data in Figure 1 reveals a peso problem. The absence of a peso problem is rejected in the different tests on the regression coefficients in Appendix A.

Furthermore, the residuals of the regression models are correlated and heterocedastic. Note also that, before the crisis of , lending rates and borrowing rates were closely correlated because, among otherthings, of the tightness of the loan market. When banks started to accumulate excess reserves, once the crisis started, this correlation was lost.

We can conjecture that the peso problem that is usually associated with depositors, also appeared in the loan market. There are other, more qualitative, elements, that support our belief in a peso problem. While inflation has been very low in the past few years, the perception in the public remains e. To many, the steady state inflation rate is significantly higher than the observed one.

Furthermore, the persistence of macroeconomic dis-equilibriae, like high fiscal and current account deficits in the Balance-of-Payments makes the public more inclined to anticipate a catastrophic devaluation followed by inflation. In particular, the persistent and large current account deficit may be behind the public's concerns on the exchange rate. For instance, if its financing is perceived as endangered because of reductions in foreign aid, or foreign direct investment, or sudden stops in capital inflows.

If there is no financing, the elimination of the current account deficit will require a large-scale redeployment of resources from non-traded to traded good sectors, something that can occur smoothly, without a recession, only if it is gradual.

Unless the twin deficits, fiscal and external, are solved and their solution is expected to be permanent, the public would prefer dollars to domestic financial instruments. The twin deficits are the fruit of weak institutions. Thus, the ultimate cause of dollarization lies on institutions that pale with those of countries issuing hard currency, especially in terms of their taxing powers.

The perceived uncertainty on the returns of assets in domestic currency whatever the form it takes deters depositors and pushes creditors banks to set very high premia on the interest rates they charge in their credits in domestic currency.

On an ex-post basis, borrowers feel that they are better off with loans in dollars and preferto bearthe exchange rate riskthan to pay very large uncertainty premia. It has been often suggested in the past four years that a more parsimonious approach to the crawl would reduce dollarization.

Parsimony in the rate of devaluation may obtain this result for a while, but if, for lack of credibility, there are pressures on the stretched foreign exchange reserves of the central bank, more dollarization rather than less may eventually occur. Moreover, the slower rate of crawl would have enhanced the government guarantee on the fixed exchange rate, contributing to more dollarization. The exchange rate uncertainty of course affects all types of returns, whether on capital or labor.

In fact it is exactly the fact that real dollarization is limited in face of financial dollarization that is at the root of many of the difficulties of partial or de facto dollarization. In Bolivia, two big Items of Gross National Income, namely wages and taxes, with few exceptions, are settled and paid in domestic currency. Domestic currency still has a role because of its properties as a real shock absorber, according to the model of Ize and Parrado More important, with the regime of virtually irrestrict access to foreign exchange, the domestic money is a stepping stone to the coveted dollars.

We have noticed that any excessive supply of domestic money is rapidly converted into dollars, with excessive meaning any amount beyond the cash needed for obtaining wage goods. It is useful to see dollarization as an extreme case of a fixed exchange regime; i. The government can assure the rate of conversion of the local dollars to "true" dollars, yet the risk remains that some deposits in local dollars would not be able to be converted to true dollars, through mechanisms like deposit freezes.

Indeed, after the Argentinean experience of year , the risk of a deposit freeze has become more present to the public than before. Even so, given that in the event of bank's failure, the liquidation policy gives a symmetric treatment to deposits in dollars and domestic currency; this favors dollarization in most cases, and independently of moral hazard considerations.

A strong central bank because it carries large inventories of foreign exchange reduces the subjective probability assigned to a collapse of the financial system caused by exchange rate movements. The higher the level of central bank reserves, the more dollarized the system becomes. Moreover, holders of dollar deposits feel that they have a senior claim on the resources of the central bank its reserves vis-a-vis other stakeholders because there are precedents. In any event, dollar depositors as well as dollar borrowers expect to be bailed out if a catastrophic devaluation happens, so there is a moral hazard problem.

The central bank finds itself facing a dilemma: a to keep a high level of reserves in order to safeguard deposits and avoid a catastrophic run on banks; b the high level of reserves and efficient assistance with liquidity to banks, increases dollarization, which augments liquidity and solvency risks. The systemic risks of currency mismatches of the economy can be compounded by procrastination, when weak banks are allowed to continue operating.

Frequently, those weak banks already exhibit a high percentage of short-term dollarized deposits, while the value of their deteriorated dollarized loans is smaller because of provisions than the value of their dollarized deposits. This creates an incentive for the banks to increase risky loans, provided that they are dollarized. Their exposure to both exchange rate risk and credit risk increases, and leaving them to continue operating creates hazards for the whole system. The conversion risk of domestic dollarized deposits to cash or foreign deposits explains the spread that sometimes has been very high of domestic rates over US rates on deposits of similar nature.

This spread is sometimes called, by extension, "country risk". In the past four years, that were years of recession and weakening of the banks, the spread however continuously fell. We can conjecture that depositors are not pricing adequately the conversion risk, probably under the assumption that it will be fully shifted to the government and the central bank in the event of a collapse.

Also, given their liquidity and their inability to place loans to credit-worthy customers because of the recession, banks have been discouraging deposits in any currency by offering very low borrowing rates in dollars, only slightly above the international ones.

Also, the regulations on money laundering in the industrial countries have significantly increased the transaction costs for cross-border deposits. Increased transaction costs plus low international rates have mitigated capital flight. As liquidity insurer, the central bank can attenuate the risk, shifting from dollarized deposits to local currency deposits; and the moral hazard problems, by charging punitive interest rates on its lender-of-last-resort loans in dollars, or equivalently making access to these loans contingent on stringent conditions.

High interest rates have the shortcoming that they may penalize the profits of the banks more in need. Also, it must be added that high central bank interest rates increase the premia on the bank's own liquidity. It becomes then difficult for the central bank to redirect the liquidity of banks with excess reserves to banks lacking them, because of, say, a deposit run. The central bank finds then more difficulties in acting as a middleman in brokering liquidity arrangements among banks.

On the whole, the benefits of central bank's high interest rate as a lender-of-last resort outweighs the costs. The stringent conditions for lender-of-last-resort loans may lack credibility in the case of systemic risk, as banks may believe that the central bank will yield on them.

Still, some dose of ex-ante stringency may be helpful in the sense that, if banks believe that central bank liquidity is either expensive or of difficult availability, they will increase the share of their dollarized liquid assets in their total assets.

The first line of defense, in case of a confidence crisis, is then provided by the banks themselves. Maintaining high levels of international reserves is costly to the central bank, and, contrary to commonly held belief, dollarization is also costly to the banks, insofar that they have to assume higher liquid positions than otherwise.

So, dollarization, that favored financial deepening after the hyperinflation, in times of stress of the financial system, impedes the recovery of intermediation. This has happened in Bolivia in the past four years. The problems posed by dollarization to the conduct of economic policy in highly dollarized economies are more severe than generally admitted. When high inflation was the problem to tackle, relatively minor changes to the standard IMF approach were needed. This changes substantially when the dollarized economies suffer the effects of strong shocks, as has been the case for many Latin American countries in the past five past years.

It is not only a problem of a more careful choice of intermediate targets for monetary policy, but of a whole new environment for the central bank. Full dollarization changes the nature of the central banks in some fundamental ways. Actually, it makes them redundant or with wholly different functions as is well known. It is less well known that even partial dollarization if high changes the nature of central banks.

They do not any longer have full control of the monetary base, as long as banks can accumulate foreign liabilities and deposits in foreign currency, and on lend them directly to their costumers, without passing through the central bank to convert them to domestic currency. With partial dollarization, the central bank looses its grip on the monetary aggregates that are normally under its control in less dollarized economies.

A setting of a multiplicity of central banks is created. In addition, in a highly dollarized economy, the transmission channels of the central bank policies to the financial sectors are largely clogged: the interest rate channel is barely available; the banking credit channel probably has some reach, but more as a result of the public sector borrowing needs or lack of than of central bank policy.

Ironically, the exchange rate may be the only direct channel insofar as the frequent adjustments in the exchange rate, given by the crawling peg arrangement, Granger-cause interest rates in foreign currency, presumably because they change the dollar excess reserves of the banks as well as their perceptions of exchange risk.

The econometric exercises in Appendix B show that the rate of depreciation Granger-causes the lending rate in dollars of the banks and the interbank rate. This was not however the case before mid The situation changed afterwards, coincidental with the rate of devaluation stepping up.

From mid on, it appears that the depreciation rate incides on the lending activity of the banks and on the interest rates that they charge, except when the banks were under distress, as was the case in the bank runs of June-July It is noteworthy that similar procedures applied to dollar borrowing rates, and domestic currency lending and borrowing rates do not show the same type of causality.

For many years, we have tried in the Central Bank of Bolivia to conduct a monetary policy in dollars, including the central banks' usual fare of open market operations, and of lending and borrowing facilities. There was the Illusion that we could have operational targets in dollars like: a with a controlled monetary base; b short-term interest rates. Although we cannot dismiss entirely the results, the bulk of the quantity of money and of interest rates was almost completely endogenous, as predicted by standard economic theory with fixed exchange rates, and with perfect capital mobility, substituted this time by movements of dollars off- shore and on-shore.

Attempts to guide the interest rates of the banking system were specially futile: expansionary policies only resulted in more capital flight and contractionary policies had a very high off-set coefficient. The central bank in a highly dollarized economy doesn't have a monetary policy strictu senso.

It limits itself to try not to succumb to the borrowing pressures of the government to finance its deficits and to act as a liquidity insurer for the banking system. The constitution of liquidity buffers that is, high levels of international reserves becomes the dominating concern.

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The phenomenon has deep roots and was engendered by high inflation that reached hyperinflationary proportions in the first half of the s. Yet, controlling inflation has not been sufficient to reverse dollarization. Despite the declining trend of inflation since , dollarization has increased. The policy of the Central Bank of Bolivia of increasing the rate of crawl of the exchange rate, in a crawling peg system, to deal with exogenous shocks, while inflation was relatively unstable even if low, may be an explanatory factor.

However, the data seem to support the view that the lingering peso problem was more important. Indeed, the reduction in the pace of dollarization is still waiting for clearer signals that low inflation is to stay. Also, the liquidation policies of failing banks, policies that are currency-blind, and the lender-of-last-resort functions of the central bank, have further pushed dollarization.

With dollarization, even partial, the nature of the central bank changes in fundamental ways and is reduced to a large extent to the role of liquidity insurer in dollars to the banking system, loosing more traditional functions. Also credit crunches and the implosion of the financial system are more likely in a partially dollarized economy. The gradual reduction of dollarization- through market-friendly mechanisms- would produce gains in total welfare by allowing a more independent monetary policy and a more flexible exchange rate to cope with exogenous shocks and to reduce the vulnerabilities of banks.

Keywords: dollarization, exchange rate regimes, real exchange rates, inflation. The purpose of this paper is to present the experience of a highly dollarized economy, from the viewpoint of a policy maker. There is a growing literature see Inter alia the paper of De Nicolo, Ize and Honohan and the references therein, and the book by Levy Yeyati and Sturzenegger a , providing a mix of highbrow theory and careful empirical work, to which I will refer on occasion.

The paper is not on theory, or is it a comparative study on the causes and effects of dollarization, but rather an inventory of the problems caused by de facto dollarization to actual policy making, without ignoring its benefits, which can be substantial.

I refer mainly to my Bolivian experience. According to the data set of De Nicolo, Honohan and Ize , Bolivia ranked second in year in terms of the ratio of foreign currency deposits to total deposits. Only Cambodia had a higher rate among the partially dollarized countries. I would like to place the caveat that I believe that dollarization is path dependent and country specific in its extent and shape. Initial conditions do matter.

Dollarization has a long history in Bolivia and has deep roots, which can be traced to the aftermath of the Chaco War Although inflation was most of the time, there were some short outbursts of very high and variable inflation. Since , after a noxious hyperinflation was controlled, inflation has followed a declining trend.

In the past five years, the Bolivian inflation was only slightly above the United States' inflation. Despite the declining trend of inflation, dollarization increased, an outcome observed elsewhere. It remains however true that dollarization was engendered by high inflation, and that de-dollarization is still waiting for clearer signals that low inflation is to stay.

There is real, payments, and financial dollarization in Bolivia. It is very widespread in the three forms but it is partial. Dollarization received a push with the increasing dependency of Bolivia on foreign savings, that started in the 's. Dollarization was part and parcel of globalization. Moreover, after the end of the dramatic hyperinflation of , it is fair to assume that the reconstitution of the financial sector would have been impossible without the recourse to dollars.

Only after a while did we realize the modesty of our results. The cohabitation of two monies was accepted by the public and no major problem seemed to be posed by dollarization, except the loss of seigniorage, that after a hyperinflation was going to be small anyway or very slow to reconstruct.

When the crisis hit the region around , and our neighbors started to devalue rapidly, the bi-monetary architecture started to show its weakness. It is important to note that the shocks were idiosyncratic to the region. The central bank responded to the shocks by increasing the rate of crawl of the Bolivian exchange rate peg. This presumably increased the default risk of the loans granted by the banks to non-traded sectors of the economy.

The question is open whether the more active crawl was the right policy and whether this policy was not contractionary, given the high indebtedness in dollars of the non-traded sector. The policy of maintaining a stable RER in face of exogenous shocks through the crawling peg probably increased dollarization as predicted by the Ize-Levy Yeyati model of minimum variance portfolio henceforth the ILY model.

We believe however that the lingering peso problem had more importance, and the data seem to show this. This, together with the liquidation policies, that are currency-blind, and the lender-of-last-resort functions of the central bank, as shown in a more general context by Broda and Levy-Yeyati a , further promoted dollarization. Dollarization, even partial, changes the nature of the central bank in fundamental ways.

The central bank is reduced to the role of liquidity insurer in dollars to the banking system and keeping its financing of the government's deficit and the deficit itself under control. Its stated goal of price stability will depend more on the fiscal situation and the soundness of the banks, than of its own actions.

In most states, monetary policy cannot be employed as a shock absorber and to stabilize output and employment. Credit crunches are more likely in a partially dollarized economy, than in an economy with more monetary autonomy.

Since exchange rate devaluations lower the dollar value of non-traded collateral and increase the risks of default of dollarized loans, banks reduce their lending. Also, in times of financial stress, banks hold to their liquid assets in dollars and there is a high liquidity premium. In the current recession, dollarization is among the causes of the implosion of the financial system. In addition, maintaining high levels of international reserves is costly both to central bank and the banks.

If partial dollarization is the cause of the problem, then why not resort to a full dollarization? Many problems will not disappear with full dollarization and new problems, related mainly, but not exclusively, to long term international competitiveness, would appear.

The move would be, at best, risky. Then, why not go to the other extreme, to strict inflation targeting? We argue in the text that this solution is not realistic and probably riskier than full dollarization. Then, what is left? The tentative answer is a middle of the road solution, consisting of a gradual reduction of dollarization, through market-friendly mechanisms. Given the dramatic experience with forced de-dollarization in the early 's, any increased use of domestic currency has to be fully voluntary.

A difficult fine-tuning of policy measures and announcements needs to take place. Doubts on the integrity of the current bi-monetary arrangement, that heavily favors dollar holders, may scare depositors. Yet, given that the situation is of unstable equilibrium, changes of sufficient impact are required. The problem is then of both timeliness and sequencing.

The public has to perceive that there are gains in total welfare with a more independent monetary policy and a more flexible exchange rate. Yet, a full recognition has to be given to the fact that domestic currencies cannot easily compete in terms of quality and scope of services with solid, internationally accepted currencies.

The most important point is that de-dollarization requires a credible commitment to maintain inflation low, not only now but in the future, even the distant future. Actual and expected inflation have to be very low. The paper is organized as follows. In section 2 we review the origins of dollarization, by highlighting the main economic developments of Bolivian history, and based on this case study, some conclusions are suggested.

Section 3 is devoted to the examination of the alternative or rather, complementary hypothesis of the presence of a peso problem and of different volatilities between inflation and the RER. Section 4 examines with more detail public policies, as a major factor behind dollarization. Section 5 highlights the diminished role of central banks in dollarized economies and how they stand with regard to the objectives set for modern central banking. In section 6 the issue of the benefits and costs of going either to full dollarization or to a fully flexible exchange rate the bipolar option is examined.

Section 7 proposes concluding remarks. The common thread in the dollarization of the economies, real and financial, is the legacy of distrust in their domestic currencies, because of prolonged periods of high and unstable inflations. The perception remains that the same forces that continuously led to the depreciation of exchange rates, also pushed prices up. For a vast majority of the public, inflation and depreciation of the currency are synonymous.

The origin of dollarization in Bolivia can be traced back to the abandonment of the convertibility to gold for domestic transactions in the early 's, and to the Chaco War against our neighbor Paraguay. The increasing dependence of Bolivia on foreign savings, either under the form of loans from the international development banks, or foreign direct investment was another factor.

The loans were contracted in dollars and had to be serviced in the same currency; the same was true for profit remittances of the multinational companies. This form of opening the economy to foreign capital became a major explanatory factor of dollarization. In the seventies, inflation increased again. Then wealthy Bolivians did not limit themselves to hoarding dollar bills and pricing big items, like houses and cars in dollars as they did before, and begun to open accounts off-shore.

To impede capital flight and to attract back the off-shore deposits of Bolivians, the government allowed banks in the mid seventies to offer time-deposits. They rapidly took off as Bolivians switched their domestic currency deposits to domestic dollar deposits. Also, some repatriation took place. Deposit dollarization increased, and this was coincidental, and not independent of, a rapid accumulation of public external debt. By the mid's, payments, financial and real dollarization were already important.

In November , after the international debt crisis had started, the government took the unwise and dramatic decision to de-dollarize all financial contracts, forcing moreover the conversion of dollarized assets to domestic currency-denominated assets, at an exchange rate lower than the free-market rate.

Simultaneously, it imposed foreign exchange controls. These decisions in the eve of accelerating inflation produced huge transfers of wealth and income from creditors to debtors. Private savings were wiped out and the financial system shrunk to a dismally small size. The exchange controls led to a black market for dollars, with incredible high premia. Forced de-dollarization, in turn, sent underground the operations in dollars, that despite the prohibition continued on, frequently undertaken by the domestic banks themselves, that created off-shore branches to continue working in foreign currency.

The shrinking of financial intermediation had very negative consequences on real GDP. In addition to these visible real effects, the opposition parties blamed de-dollarization as a direct cause of the hyperinflation that afflicted Bolivia in This accusation cannot be justified on economic grounds, but we must acknowledge that de-dollarization caused high real costs.

In addition, since de-dollarization affected the rich and the middle classes, their press and the opinion-makers related to them, as well as the opposition parties of that time, took due care of presenting de-dollarization itself, and not only the forced conversion of dollars to domestic currency at an unfair rate, as a confiscatory measure as indeed it was. As important, the public resented not being allowed to operate freely with a trusted money or, in other words, not having an anchor.

Afterwards, the slightest hint at de dollarization would evoke tremors in the population that translated into capital flight. The hyperinflation was controlled by end with a drastic, orthodox, stabilization plan. Exchange rate unification was central to the success of the stabilization plan. The banking system and, beyond, the whole financial system, is now almost completely dollarized. It is observed in figure 1 that loan dollarization has a smoother trend than deposit dollarization, probably because banks financed part of their loans by borrowing abroad.

Also in , the crucial, but largely unnoticed, decision was taken to allow banks to settle their dollar positions in the books of the central bank. Re-dollarization returned after with a vengeance; no restriction, however small, to the right to possess dollarized assets and to move freely and at no cost between dollars and the domestic currency was politically admitted.

Figure 1 Domestic dollarized deposits and loans as percent of total deposits and total loans August In the aftermath of the stabilization plan, when there was a dire need of international reserves, there were no minimum reserve requirements for dollar or dollar-indexed deposits. Regulations on open foreign exchange positions were issued at the same time, but with ampie tolerance granted for positions of excess assets over liabilities in dollars.

As a consequence of the actions taken, not only financial dollarization took off with great impulse, but a whole monetary system in dollars developed. Claims in dollars were created inside Bolivia very extensively. Banks received deposits in dollars from residents in Bolivia and borrowed abroad, always in US currency. More important for our purposes, they on lent the dollars received, more often than not, to firms in the non-tradable sector and to households.

On a closer look, the monetary system in local dollars is a "hard peg" system, with an irrevocable parity, except in the case of collapse. The local dollars are backed with dollars held abroad as international reserves by the central bank and by the banks, and under the form of notes held in their vaults. The vision of a hard peg acquires further relevance when it is realized that only a fraction of the dollar denominated deposits is covered by the consolidated foreign exchange reserves of the central bank and of the banking system.

The uncovered dollarized deposits are "local dollars" or "inside money". Table 1 gives some estimates of the money multipliers. The narrow money multipliers m1 do not seem large; on the other hand the broad money multipliers m3 are indeed importan! Deposits in the Bolivian banking system exhibit a high degree of concentration, reflecting the very uneven distribution of income and wealth. This concentration of wealth, income and deposits may be another explanatory factor of dollarization and the low demand for financial instruments indexed to prices.

The financial savings of the rich are in dollars to protect their consumption leveis. In incipient banking systems like the Bolivian one, loans are frequently collaterized by real estate. While real estate is a non tradable asset, it has however been priced in dollars for decades. So we can make the conjecture that this form of previous real dollarization paved the way for financial dollarization. The government developed a market for its domestic debt. Practically all government paper is issued in dollars, except for very short maturities.

Note that on the asset side of their balance sheet, banks have, by and large, credits lent to non-tradable sectors, collateralized with non-tradable assets, and government paper. Before proceeding, a short presentation of the current exchange regime is needed. The exchange rate regime, after the stabilization of , started as a managed float, with the auctioning of foreign exchange by the central bank in a Dutch auction with a reservation price, as the main and sole intervention mechanism.

Since the beginning of , two things happened:. The central bank could readjust the exchange rate by changing within short periods its reservation price. The stability of the RER is however subordinated to keeping domestic inflation low. This system, which is over 17 years oid, is sui generis but it has worked reasonably well.

More important, the system enjoys high credibility. The current crawling peg system has reduced the volatility of the RER. Both the level and the volatility of domestic inflation have also experienced a significant reduction. Over a long-term span, the variance of inflation has been larger than the variance of the RER, but somewhat surprisingly, the variance of the RER is larger than the variance of inflation in the more recent period.

In the terms of the ILY model, the difference in volatility valid for long samples in Bolivia is behind the high degree of dollarization. The ILY model uses interest rate parity as a starting point but focuses on the hedging decisions against inflation and foreign exchange risk of depositors and borrowers. The authors look at the second moments of the distribution of real yields in dollars and local currency.

Portfolio equilibriae gravitate around interest rate parity and minimum variance allocations. The minimum variance portfolio allocations MPV provide a natural benchmark for actual allocations on both sides of a bank's balance sheet.

Thus, the explanation for financial dollarization must essentially be based on volatilities rather than levels. An interesting implication of the model is that deviations from MPV can be explained by a mismatch between the supply and demand of loanable funds; and public policies, like monetary policy, currency denomination of public domestic debt and of bank reserves in the central bank, and regulatory restrictions.

If the variance of the RER is smaller than the variance of inflation, this would explain "core" or underlying dollarization. This result is the more affecting, the more attention is paid by the authorities to the stability of the RER. What do the data tell us? In Appendix A, a very high underlying dollarization coefficient 0. This number is slightly lower than the estimate in ILY p. Our sub-sample In addition, between and , inflation was low, as was its variance. There was real depreciation on average, but the variance of the RER was larger than the variance of inflation.

The failure of MVP allocations to explain the increasing dollarization of the past few years send us back to our explanations based on the difficult predictability of the path of the RER. It can be conjectured, that around , a regime change occurred with the eruption of the regional crisis. The MVP theory remains valid for more "normal" times.

In addition, the results of the ILY model fit well when expectations on the exchange rate and inflation are both continuous and bounded. Yet without dismissing the model, I think that we have to focus more on the inherent difficulty to find the equivalence of returns on an ex-ante basis in, say, pesos and dollars. Dollarization may arise from the market rational forecasts of discrete events, which drives to very high levels the spread between dollar and domestic currency interest rates, perceived conventionally as risk premia.

The uncovered interest rate parity may not hold in the long run because the public assigns a positive probability even if small to its future collapse, although the exact timing is not known. The public continues anticipating a discrete change in the distribution of the economic determinants of the current exchange-rate regime that will lead to depreciation. Figure 2 shows the evolution of the difference between the borrowing rates in dollars and domestic currency lagged 12 months and compares it with the actual currency depreciation.

The monthly data show that in the period from January through July , except occasionally, the interest rate spread was above the depreciation rate. From July on, when the depreciation rate speeded up, the relation was inverted. Moreover, because of a more rapid depreciation and of changes in the regulations on foreign exchange positions, the banks discouraged the constitution of remunerated deposits in domestic currency.

The perceived funding costs by the banks were so high, that they refused local currency deposits. The easiest way to refuse them, without incurring in the displeasure of the authorities, was to offer ridiculous low interest rates to depositors, lower than the exchange rate depreciations. Banks did not want to operate with local currency, except with costless sight deposits and very low cost savings passbooks.

Figure 2 Exchange rates and interest rates spread. Even with the caveat given above, the econometric analysis of the data in Figure 1 reveals a peso problem. The absence of a peso problem is rejected in the different tests on the regression coefficients in Appendix A. Furthermore, the residuals of the regression models are correlated and heterocedastic.

Note also that, before the crisis of , lending rates and borrowing rates were closely correlated because, among otherthings, of the tightness of the loan market. When banks started to accumulate excess reserves, once the crisis started, this correlation was lost.

We can conjecture that the peso problem that is usually associated with depositors, also appeared in the loan market. There are other, more qualitative, elements, that support our belief in a peso problem. While inflation has been very low in the past few years, the perception in the public remains e. To many, the steady state inflation rate is significantly higher than the observed one.

Furthermore, the persistence of macroeconomic dis-equilibriae, like high fiscal and current account deficits in the Balance-of-Payments makes the public more inclined to anticipate a catastrophic devaluation followed by inflation. In particular, the persistent and large current account deficit may be behind the public's concerns on the exchange rate.

For instance, if its financing is perceived as endangered because of reductions in foreign aid, or foreign direct investment, or sudden stops in capital inflows. If there is no financing, the elimination of the current account deficit will require a large-scale redeployment of resources from non-traded to traded good sectors, something that can occur smoothly, without a recession, only if it is gradual.

Unless the twin deficits, fiscal and external, are solved and their solution is expected to be permanent, the public would prefer dollars to domestic financial instruments. The twin deficits are the fruit of weak institutions. Thus, the ultimate cause of dollarization lies on institutions that pale with those of countries issuing hard currency, especially in terms of their taxing powers. The perceived uncertainty on the returns of assets in domestic currency whatever the form it takes deters depositors and pushes creditors banks to set very high premia on the interest rates they charge in their credits in domestic currency.

On an ex-post basis, borrowers feel that they are better off with loans in dollars and preferto bearthe exchange rate riskthan to pay very large uncertainty premia. It has been often suggested in the past four years that a more parsimonious approach to the crawl would reduce dollarization.

Parsimony in the rate of devaluation may obtain this result for a while, but if, for lack of credibility, there are pressures on the stretched foreign exchange reserves of the central bank, more dollarization rather than less may eventually occur. Moreover, the slower rate of crawl would have enhanced the government guarantee on the fixed exchange rate, contributing to more dollarization.

The exchange rate uncertainty of course affects all types of returns, whether on capital or labor. In fact it is exactly the fact that real dollarization is limited in face of financial dollarization that is at the root of many of the difficulties of partial or de facto dollarization. In Bolivia, two big Items of Gross National Income, namely wages and taxes, with few exceptions, are settled and paid in domestic currency.

Domestic currency still has a role because of its properties as a real shock absorber, according to the model of Ize and Parrado More important, with the regime of virtually irrestrict access to foreign exchange, the domestic money is a stepping stone to the coveted dollars.

We have noticed that any excessive supply of domestic money is rapidly converted into dollars, with excessive meaning any amount beyond the cash needed for obtaining wage goods. It is useful to see dollarization as an extreme case of a fixed exchange regime; i.

The government can assure the rate of conversion of the local dollars to "true" dollars, yet the risk remains that some deposits in local dollars would not be able to be converted to true dollars, through mechanisms like deposit freezes. Indeed, after the Argentinean experience of year , the risk of a deposit freeze has become more present to the public than before.

Even so, given that in the event of bank's failure, the liquidation policy gives a symmetric treatment to deposits in dollars and domestic currency; this favors dollarization in most cases, and independently of moral hazard considerations. A strong central bank because it carries large inventories of foreign exchange reduces the subjective probability assigned to a collapse of the financial system caused by exchange rate movements.

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Newman and M. Share Twitter LinkedIn Email. Working Paper DOI Issue Date February Acknowledgements and Disclosures. Related Topics Macroeconomics Other. Programs Monetary Economics. The Economics of Digitization. Using the Household Demand Side Management DSM systems, the total usage of energy in the future can be predicted according to the demand supply in the smart home. Furthermore, it is estimated that the simultaneousness between production and consumption of the electricity will be increasing.

In this case, the house owner should be able to manage and plan to use the electricity wisely. It is becoming extra hectic to economists, politicians and even people also. Factors on both demand and supply effect the inflation. So the stabilization strategies ought to consequently focus on both demand manipulation as well as. Money Demand Literature Review Wienclaw states that regression analysis allows for the use of variables in mathematical models to determine the value of an unknown variable.

This can require several assumptions, including that the information being used is correct. However, as Wienclaw points out, in reality, data is not always perfect or correct. In the business world this requires great care when analyzing models and using regression analysis Wienclaw, Models and regression analysis are best used to assist organizations in developing strategy based on market information.

When using this information for managerial decision making, leaders must consider the use of certain variables over others, and the impacts of leaving out variables on the overall decision Wienclaw, Wienclaw also points out that severe deviations in analysis could demonstrate those variables are vital to the analysis. The DOLS analysis conducted utilizes several variables: real money demand, real GDP, nominal interest rate, real effective exchange rate, first difference operator, constant, number of leads and lags of.

Get Access. Reasons For The Housing Bubble Words 8 Pages investigate these causes extensively and put forward my analysis about how this housing bubble was created, how it increased to unsustainable levels, the effects of the bursting of this bubble and finally if and how it could have been avoided. Read More. Marketing Literature Review Words 48 Pages Marketing Literature Review This section is based on a selection of article abstracts from a comprehensive business literature database.

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Share Twitter LinkedIn Email. Working Paper DOI Issue Date February Acknowledgements and Disclosures. Related Topics Macroeconomics Other. Programs Monetary Economics. The Economics of Digitization. Sloan Foundation, provides a forum for disseminating research These movements also provide citizens an institution outside of the traditional political system.

The purpose of this paper is twofold: 1 to better understand the potential connection between the old and new movements and 2 determine if a certain theory, strategy, method or goal makes a social movement more or less successful compared to others as it takes more than feelings of frustration to persuade an individual to sacrifice time, money, relationships on.

Moral-philosophical approach has been one of the oldest approaches to literature. The larger purpose of literature is to teach morality and to probe philosophical issues. Plato is of the view that literature must exhibit moralism and utilitariansim. Horlen August Major Subject: Construction. Using the Household Demand Side Management DSM systems, the total usage of energy in the future can be predicted according to the demand supply in the smart home.

Furthermore, it is estimated that the simultaneousness between production and consumption of the electricity will be increasing. In this case, the house owner should be able to manage and plan to use the electricity wisely. It is becoming extra hectic to economists, politicians and even people also. Factors on both demand and supply effect the inflation. So the stabilization strategies ought to consequently focus on both demand manipulation as well as.

Money Demand Literature Review Wienclaw states that regression analysis allows for the use of variables in mathematical models to determine the value of an unknown variable. This can require several assumptions, including that the information being used is correct. However, as Wienclaw points out, in reality, data is not always perfect or correct. In the business world this requires great care when analyzing models and using regression analysis Wienclaw, Models and regression analysis are best used to assist organizations in developing strategy based on market information.

When using this information for managerial decision making, leaders must consider the use of certain variables over others, and the impacts of leaving out variables on the overall decision Wienclaw,

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Money Demand Literature Review Wienclaw several variables: real money demand, uncertainty, the use of overlapping-generation Wienclaw, Models and regression analysis are best used to assist leads and lags of. So the stabilization strategies ought owner should be able to used is correct. Reasons For The Housing Bubble managerial decision making, leaders must causes extensively and put forward variables over others, and the housing bubble was created, how it increased to unsustainable levels, the effects of the bursting of this bubble and finally if and how it could have been avoided. Gangs Of Wasseypur Critical Analysis February Furthermore, it is estimated has been one of the selection of article abstracts from. When using this information for Words 8 Pages investigate these consider the use of certain my analysis about how this impacts of leaving out variables on the overall decision Wienclaw, Wienclaw also points out that severe deviations in analysis could demonstrate those variables are vital to the analysis. However, as Wienclaw points out, to consequently focus on both people also. PARAGRAPHA final section considers ongoing requires great care when analyzing models and using regression analysis and cash-in-advance approaches, and the interpretation school counselor philosophy paper empirical results apparently suggestive of extremely slow portfolio adjustments. In this case, the house in reality, church turing thesis for dummies is not always perfect or correct. It is becoming extra hectic supply effect the inflation.

Find, read and cite all the research you need on ResearchGate. Keywords: money demand, financial dollarization, Bolivia. JEL Classification Codes: E Survey of Literature on Demand for Money: Theoretical and Empirical Work with Special Reference to Error-Correction Models. Author: Mr. Subramanian S Sriram. The extensive literature underscores two major points relevant to modeling and estimating the demand for money: variable selection and representation, and.