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Persistence of dollarization after price stabilization

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  • Rappoport, Veronica

Abstract

Credit contracts in developing countries are often denominated in foreign currencies, even after many of these economies succeeded in controlling inflation. This paper proposes a new interpretation of this apparent puzzle based on the demand for insurance against real shocks: the fact that devaluations occur more frequently in adverse states of the world provides a motive for holding dollar assets. This approach implies a complementarity between the optimal monetary policy and the currency denomination of contracts. When a large proportion of liabilities is denominated in a foreign currency, the optimal exchange rate volatility is low, which reinforces the demand for dollar assets.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 7 (October)
Pages: 979-989

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Handle: RePEc:eee:moneco:v:56:y:2009:i:7:p:979-989

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Web page: http://www.elsevier.com/locate/inca/505566

Related research

Keywords: Dollarization Nonexclusive contracts Multiple equilibria Underinsurance;

References

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Cited by:
  1. Mora, Nada & Neaime, Simon & Aintablian, Sebouh, 2013. "Foreign currency borrowing by small firms in emerging markets: When domestic banks intermediate dollars," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 1093-1107.

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