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Exchange Rate Policy and Liability Dollarization: What do the Data Reveal about Causality?
Author(s) -
Berkmen S. Pelin,
Cavallo Eduardo
Publication year - 2010
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2010.00890.x
Subject(s) - endogeneity , economics , liability , context (archaeology) , exchange rate , monetary economics , empirical evidence , identification (biology) , instrumental variable , causality (physics) , econometrics , finance , paleontology , philosophy , botany , physics , epistemology , quantum mechanics , biology
The paper identifies the contemporaneous relationship between exchange rate policy and liability dollarization using three different definitions of dollarization. The presence of endogeneity makes the empirical identification elusive. We use identification through heteroskedasticity to solve the endogeneity problem in the present context (Rigobon, 2003). While we find that countries with high liability dollarization (external, public, or financial) tend to be more actively involved in exchange rate stabilization operations, we do not find evidence that floating, by itself, promotes de‐dollarization.