Regional Inflation, Financial Integration and Dollarization (This is a revision of CentER DP 2013-073)

We exploit variation in consumer price inflation across 71 Russian regions to examine the relationship between the perceived stability of the domestic currency and financial dollarization. Our results show that regions with higher inflation experience an increase in the dollarization of household deposits and a decrease in the dollarization of loans to households and to firms in non-tradable sectors. The impact of inflation on credit dollarization is weaker in regions with less integrated banking markets. This suggests that the currency-portfolio choices of households and firms may be constrained by the asset-liability management of banks.