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Challenges of financial globalisation and dollarisation for monetary policy: the case of Peru

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  • Economics

Abstract

Challenges of financial globalisation and dollarisation for monetary policy: the case of Peru - BIS Papers No 23, part 19 May 2005 230 BIS Papers No 23 Challenges of financial globalisation and dollarisation for monetary policy: the case of Peru Julio Velarde During the last decade, the financial system of Peru has become more integrated with the global financial system, as reflected in growth in dollar deposits. Over the same period, following an episode of hyperinflation (1988-90) and confiscation of dollar deposits (1985), the level of financial intermediation in the Peruvian banking system recovered and reached its highest recorded level (25% of GDP) in 2002. This paper reviews Peru’s monetary policy experience in such an environment. In particular, the gradual reduction of financial dollarisation in the context of the recent adoption of an inflation targeting regime and the development of capital markets in local currency are discussed. Evolution of the Peruvian financial system Recovery of financial intermediation Ensuring the financial system’s ability to provide financial intermediation services has posed an important challenge for Peru. As a result of hyperinflation in 1988-90 and confiscation of dollar deposits in 1985, broad money had fallen to only 6% of GDP by 1990. The financial system recovered gradually, so that by 2002 the ratio of broad money to GDP had reached 25%, its highest recorded level (Graph 1). However, this indicator of financial intermediation is still lower than for most countries in the Latin American region. Graph 1 Broad money As a percentage of GDP 0 5 10 15 20 25 30 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 The recovery in financial intermediation was driven mainly by an increase in dollar deposits, resulting from the repatriation of Peruvian residents’ deposits held

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