Credit dollarization across firm-size segments in Peru: Are segmented credit markets interconnected?

This paper studies how credit de-dollarization occurs in a financially dollarized economy. Using monthly Peruvian credit data by firm-size segment and currency, we first show that aggregate de-dollarization is driven mainly by changes in the currency composition of credit within borrower segments, rather than by shifts in the allocation of credit across borrower groups. A nested currency decomposition indicates that this adjustment is primarily associated with local-currency credit expansion, not only with foreign-currency credit contraction. We then estimate a VARX connectedness system in which macro-financial variables enter as exogenous controls. Conditional Diebold-Yilmaz connectedness among segment-level dollarization changes is moderate throughout the sample. It increases during the pandemic liquidity episode and remains above its pre-pandemic level during normalization, but its magnitude does not support the view of a highly integrated dollarization network. Finally, a currency-block connectedness exercise shows that, after 2020, local-currency credit becomes more connected across borrower segments and contributes more to cross-currency transmission than foreign-currency credit. The results suggest that Peru’s de-dollarization was mainly a within-segment shift toward local-currency credit, and that after 2020 this margin became more embedded in cross-segment credit dynamics. The evidence is therefore more consistent with local-currency credit deepening than as a mechanical reallocation of credit or a purely spillover process.