Dollarization of banking, financial stability and financial liberalization

This dissertation studies three closely-related financial issues in developing countries: the links between exchange rate regimes and the dollarization of banking, the causes of financial crises, and the growth effects of financial liberalization. To that end, Chapter 1 provides an overview of these issues.; The dollarization of bank deposits and credit is widespread in developing countries, resulting in varying degrees of currency mismatches in domestic financial intermediation, which in turn may accentuate balance-sheet problems and financial fragility. It is widely argued that flexible exchange rate regimes encourage banks to match dollar-denominated liabilities with a corresponding amount of dollar-denominated assets, ameliorating currency mismatches. Does the behavior of dollar deposits and credit in financially dollarized economies support that presumption? Chapter 2 addresses this question. A new database on deposit and credit dollarization in developing countries is assembled for that purpose. Empirical results suggest that, if anything, floating regimes exacerbate, rather than ameliorate, currency mismatches in financial intermediation, as those regimes encourage deposit dollarization more strongly than they encourage matching via credit dollarization.; The existing empirical literature on banking crises has not produced agreement on their causes. Chapter 3 attempts to determine what we know about the determinants of developing-country crises by establishing which previous results are robust. Among the robust causes of banking crises are rapid domestic credit growth, large bank liabilities relative to reserves, and deposit-rate decontrol. On the other hand, there is no compelling evidence of any particular relationship between exchange rate regimes and crises. Finally, the evidence that deposit insurance or a weak institutional environment heighten crisis risk appears to be fragile.; Chapter 4 focuses on the effects of capital account liberalization on growth. It finds only weak evidence that such effects vary with financial and institutional development. In contrast, it reports a significant positive growth effect in countries that have already opened more generally. While trade openness has a positive impact on growth, the positive effect of capital account openness on growth is not contingent on the openness of trade; rather, it is contingent on the absence of macroeconomic imbalances. This is evidence that the sequencing of reforms shapes the effects of capital account liberalization.