RISK, DOLLARIZATION, AND INTEREST IN EMERGING MARKETS1

Summary: With a panel-data approach, this paper expands the scope of the financial dollarization literature to investigate the determinants of the real interest rate in emerging economies. This is found to depend on inflation volatility and inflation acceleration, as well as on public debt size, investment-grade status, and per capita income. Deposit dollarization, as anticipated in an analytical model, reduces the real interest rate. The empirical results are used to investigate the mystery of Brazil’s very high real interest rates