Dollarization hysteresis and network externalities: theory and evidence from an informal Bolivian credit market

This paper considers network externalities from currency acceptability as a determinant of observed persistence of dollarization in Latin American countries. A model with efficiencies from establishing a network of currency users is constructed. Model implications are then tested using a unique data set of daily loan records from an informal Bolivian credit market. Empirical results are consistent with dollarization hysteresis being driven by network externalities from currency adoption. The results also imply that credible exchange rate stabilization policy alone is not sufficient to achieve dollarization reversal.