In emerging-market economies (EMs), a proxy measure of DLD is constructed by summing dollar deposits and bank foreign borrowing as a share of GDP.
[5] In an economic environment characterized by these features, the domestic currency (often generically referred to as the peso) serves neither as a reliable medium of exchange nor a predictable store of value.
When DLD is widespread, economic actors are often required to experience a currency mismatch between domestically denominated income and dollar-denominated liabilities, which represent the only available means of long-term borrowing.
For the reverse causality, on the other hand, the authors do not find evidence that more active intervention in foreign exchange markets (i.e., more fixing) leads to higher liability dollarization.
Yet reducing inflation alone is generally not considered sufficient to achieve de-dollarization, as economies with high levels of DLD may exhibit hysteresis once actors adjust their expectations and behaviors to transactions denominated in foreign currency.
Under less favorable circumstances, or in the absence of policies designed to facilitate adjustment, forced de-dollarization has provoked extensive capital flight and/or steep declines in financial intermediation.
[13] This revival may represent an attempt to "lean against the wind" in the face of expectations of currency appreciation as well as a response to the collapse of Argentina's Convertibility regime, which illustrated the macroeconomic risks of extensive DLD.
A second potential channel of de-dollarization is the increasing use of domestic currency lending to the private sector as well as to sovereigns and subnational governments by international financial institutions, particularly the Inter-American Development Bank.