Event start date: 14.06.2021 17:00

On 14 June 2021, the National Bank of Ukraine hosted an open research seminar, during which Husnu C. Dalgic (University of Mannheim) presented the research paper "Financial Dollarization in Emerging Markets: Efficient Risk Sharing or Prescription for Disaster?". Households in emerging markets hold significant amounts of dollar deposits while firms have significant amounts of dollar debt. Motivated by the perceived dangers, policymakers often develop regulations to limit dollarization. In this paper, author draws attention to an important benefit of dollarization, which should be taken into account when crafting regulations. He argues that dollarization represents an insurance arrangement in which the entrepreneurs that own firms provide income insurance to households. Emerging market exchange rates tend to depreciate in a recession so that dollar deposits in effect provide households with income insurance. With their preference for holding deposits denominated in dollars, households effectively starve local financial markets of local currency, which raises local interest rates. By raising local currency interest rates, they cause entrepreneurs to borrow in dollars. Consistent with this argument, countries in which the exchange depreciates in a recession have a higher level of deposit and credit dollarization. In those countries, it’s verified that the premium of the local interest rate over the dollar interest rate is higher. This premium is the price paid by households for insurance.

Materials from the seminar are available via links below.