This Time Is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart & Kenneth Rogoff

Author:Carmen M. Reinhart & Kenneth Rogoff [Reinhart, Carmen M. & Rogoff, Kenneth]
Language: eng
Format: epub, mobi
Tags: Economics
ISBN: 9780691152646
Publisher: Princeton University Press
Published: 2009-01-02T00:00:00+00:00

Undoing Domestic Dollarization

We have shown that reducing inflation is generally not sufficient to undo domestic dollarization, at least at horizons of more than five years. Nevertheless, some countries have managed to reduce their degree of domestic dollarization. To identify those countries, it is useful to treat separately cases in which the reduction in domestic dollarization originated in a decline in locally issued foreign currency public debt from those that originated in a decline in the share of foreign currency deposits in broad money.

The few governments in our sample that managed to de-dollarize their locally issued foreign currency obligations followed one of two strategies: they either amortized the outstanding debt stock on the original terms and discontinued the issuance of those securities, or they changed the currency denomination of the debt—sometimes, but not always, using market-based approaches. One example of the former strategy is Mexico’s decision to redeem in U.S. dollars all the dollar-linked tesobonos outstanding at the time of its December 1994 crisis (using the loans it received from the International Monetary Fund and the United States) and to cease issuing domestic foreign currency–denominated bonds thereafter. A recent example of the latter is Argentina’s decision in late 2001 to convert to domestic currency the government bonds that it had originally issued in U.S. dollars (under Argentine law).

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