The authors would like to thank Editor Paul Evans and two anonymous referees for valuable comments. Any remaining errors are ours. Shu Lin would like to thank the Natural Science Foundation of China (71222301) and Social Science Project (2012SHKXQN001) of Fudan University for financial support.
Does Inflation Targeting Help Reduce Financial Dollarization?
Version of Record online: 9 SEP 2013
© 2013 The Ohio State University
Journal of Money, Credit and Banking
Volume 45, Issue 7, pages 1253–1274, October 2013
How to Cite
LIN, S. and YE, H. (2013), Does Inflation Targeting Help Reduce Financial Dollarization?. Journal of Money, Credit and Banking, 45: 1253–1274. doi: 10.1111/jmcb.12051
- Issue online: 9 SEP 2013
- Version of Record online: 9 SEP 2013
- Manuscript Accepted: 19 SEP 2012
- Manuscript Received: 7 OCT 2011
- Natural Science Foundation of China. Grant Number: 71222301
- Social Science Project. Grant Number: 2012SHKXQN001
- financial dollarization;
- inflation targeting;
- portfolio model;
- treatment effect;
- propensity score matching
We examine whether adopting an inflation-targeting regime helps reduce financial dollarization as predicted by Ize and Levy Yeyati's (2003) portfolio model. To address the self-selection problem of policy adoption, we apply a variety of propensity score matching methods to a large sample of 106 developing countries for the years 1985–2004. We find strong evidence that inflation targeting has large and significant treatment effects on lowering both actual financial dollarization and the model implied minimum variance portfolio dollarization. Our results are robust to alternative samples and model specifications and also to control for additional factors in postmatching regressions.