"Dollarization" and its effects on the soundness of Peruvian financial system

Abstract

Peru has an economy partially "dollarized" where 70% of the liquidity of the bank system has been in US dollars during the last decade. Most of the salaries and goods trading are in "soles" (Peruvian currency) but the companies and people borrow and save in US dollars.

This "dollarization" strangles the economy because any currency depreciation policy to reactivate the economy or any macroeconomic shock that really produces it increases the value of debts (exchanged to soles) and produces an inverse effect and therefore recessively.

The paper objective is to propose strategies that could reduce the disadvantages of the "sol" against the US dollar in such a way that economic agents return to the "sol" by own decision rather than an imposed policy which would facilitate the implementation of other economic policies.