Dollarization, Bailouts, And The Stability Of The Banking System
AbstractCentral bank policy suffers from time inconsistency when facing a banking crisis: a bailout is optimal ex post, but ex ante it should be limited to control moral hazard. Dollarization provides a credible commitment not to help at the cost of not helping even when it would be ex ante optimal to do so. Dollarization is good when the costs of establishing a reputation for the central bank are high, monitoring effort by the banker is important in improving returns, and when the cost of liquidating projects is moderate. However, a very severe moral hazard problem could make dollarization undesirable. The results obtained are applied to assess the desirability of dollarization in a range of countries and the potential role of the IMF as International LOLR. We would never put ourselves in a position where we envisioned actions that we would take would be of assistance to the rest of the world but to the detriment of the United States. Alan Greenspan to a congressional panel in 1999 [IHT, January 19, 2000]. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
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Bibliographic InfoArticle provided by MIT Press in its journal The Quarterly Journal of Economics.
Volume (Year): 117 (2002)
Issue (Month): 2 (May)
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Web page: http://mitpress.mit.edu/journals/
Other versions of this item:
- Gale, Douglas & Vives, Xavier, 2002. "Dollarization, bailouts, and the stability of the banking system," HWWA Discussion Papers 185, Hamburg Institute of International Economics (HWWA).
- Gale, Douglas M & Vives, Xavier, 2001. "Dollarization, Bailouts and the Stability of the Banking System," CEPR Discussion Papers 2901, C.E.P.R. Discussion Papers.
- Douglas Gale & Xavier Vives, 2001. "Dollarization, bailouts, and the stability of the banking system," Proceedings 729, Federal Reserve Bank of Chicago.
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F30 - International Economics - - International Finance - - - General
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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