Dollarization in Bolivia: Recent Trends and Future Perspectives

Abstract

In Latin America, during the last 3 decades, various countries experienced gradual processes of dollarization. In the case of Bolivia, the preference of Bolivian agents for dollar denominated financial assets is attributed, generally, to the hyperinflation experienced during 1984-1985, and to the lack of confidence on the stabilization program introduced in 1985. The paper presents evidences that the increased dollarization of the financial system in Bolivia, during a period of relative economic stability (1986-1995), is due to the prevailing structure of interest rates, that incentives deposits in dollars. Initially, the document examines empirical evidences, utilizing unit root tests, which leads to accept the assumption that the dollarization in Bolivia is a transitory process. The results also show that the interest rate differential between the local currency deposits and dollar deposits causes, in the Granger sense, the evolution of financial sector dollarization degree. The interest rate differential elasticity of the dollarization process, utilizing ex ante returns, is substantially higher than those found in previous works and is statistically significant. Finally, the paper finds evidences that political transition, which minimize the uncertainty about the direction of the macroeconomic policies, helps to revert the dollarization process.