Financial de-dollarization dynamics: The role of macroeconomic fundamentals and IMF programs

Domestic dollarization reflects currency risk, credibility challenges, and concerns related to monetary sovereignty, and remains a central policy issue in many economies. This paper examines the dynamics of deposit dollarization using a panel of 12 emerging economies with significant deposit dollarization over the period 1980–2023. We find that deposit dollarization decreases following the adoption of an IMF program. We also show that market-based measures in particular the development of local-currency bond markets, are more consistently associated with de-dollarization than administrative measures . Only specific instruments out of administrative measures are associated with lower dollarization (reserve requirements on foreign-currency lending and the mandated use of the local currency in domestic transactions), and this is only observed at longer horizons. In addition, ex-post IMF-supported programs are associated with stronger de-dollarization outcomes than ex-ante arrangements. These findings contribute to the empirical literature on financial dollarization and provide evidence on policy strategies aimed at reducing currency substitution and strengthening financial stability in highly dollarized economies.