Macroeconomic Implications of Financial Dollarization

Uruguay has experienced a remarkable recovery since the 2002 crisis, with the help of sound policies and favorable external conditions. Uruguay abandoned an exchange rate peg in favor of a free float, adopted a monetary regime initially based on money targets, improved financial prudential norms and supervision, and accumulated significant central bank reserves. Uruguay now faces new challenges in stabilizing its economy through postcrisis monetary and financial reforms. The analysis in this Occasional Paper bears directly on the ongoing efforts to move toward a fully fledged inflation-targeting regime, to develop interest rates as monetary instruments, to improve the preparedness of the financial system to deal with shocks, and to ensure the adequacy of current central bank reserves.