Essay on Dollarization in Emerging Markets

dc.contributor.advisorCubas Norando, German
dc.contributor.committeeMemberPaluszynski, Radek
dc.contributor.committeeMemberPinto, Pablo M.
dc.contributor.committeeMemberSorensen, Bent E.
dc.creatorMendoza Perez, Liu Anibal
dc.date.accessioned2023-06-14T17:15:43Z
dc.date.available2023-06-14T17:15:43Z
dc.date.createdMay 2023
dc.date.issued2023-05-12
dc.date.updated2023-06-14T17:15:44Z
dc.description.abstractThis dissertation investigates financial dollarization in low-inflation emerging economies, linking high dollarization levels with past inflation history. High inflation episodes are typically associated with large fiscal deficits financed by money creation. This results in the loss of value of the local currency against goods and other currencies, which leads to high inflation levels and a significant depreciation of the domestic currency. High inflation undermines the local currency's ability to serve as money, making transactions, pricing, and saving challenging. In this context, access to a foreign currency that maintains its real value over time, typically the US dollar or the Euro, leads to dollarization: economic agents start saving, setting prices, and conducting transactions in this currency. Based on vast literature showing the adverse effects of dollarization on monetary policy effectiveness and financial stability, several dollarized economies implemented measures to reduce their dollarization levels. However, de-dollarization proved elusive despite macroeconomic reforms leading to low and stable inflation levels. Current literature struggles to understand why dollarization, especially savings dollarization, remains high in low-inflation emerging economies. Using a portfolio-choice model with heterogeneous agents, inflation and nominal depreciation shocks, and access to dollar deposits, I study dollarization hysteresis in low-inflation emerging economies and the distributional consequences of de-dollarization policies. The novel feature in my model is that households exhibit fear of inflation: despite current low inflation levels, the possibility of future high inflation episodes triggers a precautionary demand for dollar deposits to insure against this risk. The key to this result is that inflationary crises come hand-in-hand with currency crashes. I show that a small probability of high inflation can explain large and persistent dollarization levels. My model generates a positive correlation between wealth and dollarization, as in the data. This result arises because the relative importance of inflation shocks for poorer households is lower than the income shocks they face. Finally, I show that de-dollarization strategies restricting access to foreign currency deposits, widely implemented in emerging economies, might reduce welfare. Instead, de-dollarization strategies should focus on reducing the probability of returning to high inflation or high depreciation episodes.
dc.description.departmentEconomics, Department of
dc.format.digitalOriginborn digital
dc.format.mimetypeapplication/pdf
dc.identifier.urihttps://hdl.handle.net/10657/14531
dc.language.isoeng
dc.rightsThe author of this work is the copyright owner. UH Libraries and the Texas Digital Library have their permission to store and provide access to this work. Further transmission, reproduction, or presentation of this work is prohibited except with permission of the author(s).
dc.subjectDollarization
dc.subjectFear of inflation
dc.subjectHeterogeneous agents
dc.titleEssay on Dollarization in Emerging Markets
dc.type.dcmiText
dc.type.genreThesis
thesis.degree.collegeCollege of Liberal Arts and Social Sciences
thesis.degree.departmentEconomics, Department of
thesis.degree.disciplineEconomics
thesis.degree.grantorUniversity of Houston
thesis.degree.levelDoctoral
thesis.degree.nameDoctor of Philosophy

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