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Does Inflation Targeting Help Reduce Financial Dollarization?
Author(s) -
LIN SHU,
YE HAICHUN
Publication year - 2013
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12051
Subject(s) - portfolio , economics , inflation (cosmology) , selection (genetic algorithm) , monetary policy , inflation targeting , variance (accounting) , propensity score matching , matching (statistics) , econometrics , variety (cybernetics) , monetary economics , finance , computer science , accounting , statistics , physics , mathematics , artificial intelligence , theoretical physics
We examine whether adopting an inflation‐targeting regime helps reduce financial dollarization as predicted by Ize and Levy Yeyati's ([Ize, Alain, 2003]) portfolio model. To address the self‐selection problem of policy adoption, we apply a variety of propensity score matching methods to a large sample of 106 developing countries for the years 1985–2004. We find strong evidence that inflation targeting has large and significant treatment effects on lowering both actual financial dollarization and the model implied minimum variance portfolio dollarization. Our results are robust to alternative samples and model specifications and also to control for additional factors in postmatching regressions.