Abstract

The purpose of this study is to determine the most effective policy tool, with an emphasis on macroprudential policies, for decreasing dollarization in Armenia. Armenia exhibits portfolio dollarization, meaning inflation is not the root cause (inflation levels are very low in Armenia, and typically high inflation drives dollarization). The effects on the deposit dollarization rate by a number of policies was tested through six separate regressions using Matlab and through VAR modeling in Eviews. It was determined that to decrease the rate of dollarization, the policy of keeping dollar-denominated deposits in drams should be reversed, as this is a contributor to dollarization, and that loan loss provisions for dollar loans are particularly effective in decreasing dollarization. Making use of more loan loss provisions (and making them dynamic) for dollar loans and establishment of loan to value ratio caps for dollar loans would benefit the dedollarization process in Armenia.