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Is Brazil different? : risk, dollarization, and interest rates in emerging markets

Author: Edmar Lisboa Bacha; Márcio Holland; Fernando M Gonçalves; International Monetary Fund. Western Hemisphere Department.
Publisher: [Washington, D.C.?] : International Monetary Fund, 2007.
Series: IMF working paper, WP/07/294.
Edition/Format:   eBook : EnglishView all editions and formats
Database:WorldCat
Summary:
We investigate the role of financial dollarization in the determination of real interest rates in emerging economies. In a simple analytical model, we show that a strategy of "dedollarizing" the economy, if it fails to address fundamental macroeconomic risks, leads to higher domestic real interest rates. We confirm this prediction in an empirical model, but find that the effect is small after controlling for the  Read more...
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Genre/Form: Electronic books
Additional Physical Format: Print version:
Bacha, Edmar Lisboa.
Is Brazil different?.
[Washington, D.C.?] : International Monetary Fund, ©2007
(OCoLC)221006159
Material Type: Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Edmar Lisboa Bacha; Márcio Holland; Fernando M Gonçalves; International Monetary Fund. Western Hemisphere Department.
ISBN: 1283516055 9781283516051
OCLC Number: 560672823
Notes: "December 2007."
At head of title: Western Hemisphere Department.
Reproduction Notes: Electronic reproduction. [S.l.] : HathiTrust Digital Library, 2010. MiAaHDL
Description: 1 online resource (25 p.) : ill.
Details: Master and use copy. Digital master created according to Benchmark for Faithful Digital Reproductions of Monographs and Serials, Version 1. Digital Library Federation, December 2002.
Series Title: IMF working paper, WP/07/294.
Responsibility: prepared by Edmar L. Bacha, Márcio Holland, and Fernando M. Gonçalves.

Abstract:

We investigate the role of financial dollarization in the determination of real interest rates in emerging economies. In a simple analytical model, we show that a strategy of "dedollarizing" the economy, if it fails to address fundamental macroeconomic risks, leads to higher domestic real interest rates. We confirm this prediction in an empirical model, but find that the effect is small after controlling for the risks of dilution and default. Brazil provides a natural case study given its low degree of financial dollarization and very high real interest rates. The estimated model is unable to explain the high interest rate levels in the aftermath of Brazil's 1994 inflation stabilization. However, since the adoption in 1999 of inflation targeting and floating exchange rates, Brazil's real interest rates are gradually converging to the model's predicted values. The estimation also shows that further drops in Brazil's real interest rates could be achieved more effectively through improvements in fundamentals that lead to investment-grade status rather than through financial dollarization.

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