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Endogenous Financial Dollarization and Exchange Rate Policy

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  • Roberto Chang
  • Andres Velasco

Abstract

We develop a simple model of an economy in which domestic agents borrow and lend from each other in either home or foreign currency. Nominal wage rigidity implies that portfolios are chosen to offset the real variability of labor income. Portfolio choices, in turn, affect the potency of monetary policy, and the mapping from exogenous shocks to aggregate outcomes. The model sheds light on the determinants and implications of financial dollarization, its interaction with monetary policy, and other current issues.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/13841280500387182
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Economic Policy Reform.

Volume (Year): 8 (2005)
Issue (Month): 4 ()
Pages: 263-280

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Handle: RePEc:taf:jpolrf:v:8:y:2005:i:4:p:263-280

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Related research

Keywords: Financial dollarization; exchange rates; monetary policy;

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  1. Ricardo Caballero & Arvind Krishnamurthy, 2000. "International and Domestic Collateral Constraints in a Model of Emerging Market Crises," NBER Working Papers 7971, National Bureau of Economic Research, Inc.
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