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Inflation Risk and Portfolio Allocation in the Banking System

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Author Info
Pablo Druck
Pietro Garibaldi

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Abstract

This paper proposes theory and evidence on the relationship between inflation and the bank's portfolio allocation. The proposed idea rationalized what Rodriguez (1992) pointed out with respect to the Central Bank of Argentina, behaving as a "borrower of first resort", where banks reallocated their investment from the private sector to government bonds. A main component of inflation costs is the misallocation of resources, this paper shows a channel through the reallocation of credits, where the credit market for the private sector trend to disappear. Theoretically, this paper studies the behavior of risk-neutral financiers in a world in which monitoring costs, and limited liability on the part of firms leads to credit rationing equilibria. In light of the well established relation between inflation and changes in relative prices, the theoretical model rationalizes the relationship between inflation and the allocation of capital in the banking system. Empirically, it looks at the dynamic behavior of the composition of bank's assets in Argentina between 1983 and 1998, which shows a robust relationship between relative price variability and bank's allocation in government denominated assets.

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Paper provided by Universidad del CEMA in its series CEMA Working Papers: Serie Documentos de Trabajo. with number 181.

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Date of creation: Dec 2000
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Handle: RePEc:cem:doctra:181

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  1. Casella, Alessandra & Feinstein, Jonathan S, 1990. "Economic Exchange during Hyperinflation," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 1-27, February. [Downloadable!] (restricted)
  2. Bernanke, Ben & Gertler, Mark, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 87-114, February. [Downloadable!] (restricted)
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  3. Carlos A. Rodríguez, 1992. "Financial Reforms in Latin America: The Cases of Argentina, Chile and Uruguay," CEMA Working Papers: Serie Documentos de Trabajo. 84, Universidad del CEMA. [Downloadable!]
  4. Sebastian Edwards & Carlos A. Végh, 1997. "Banks and Macroeconomic Disturbances Under Predetermined Exchange Rates," CEMA Working Papers: Serie Documentos de Trabajo. 115, Universidad del CEMA. [Downloadable!]
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  5. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April. [Downloadable!] (restricted)
  6. Mankiw, N Gregory, 1986. "The Allocation of Credit and Financial Collapse," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 455-70, August. [Downloadable!] (restricted)
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  7. Kiguel, Miguel A & Neumeyer, Pablo Andres, 1995. "Seigniorage and Inflation: The Case of Argentina," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 672-82, August. [Downloadable!] (restricted)
  8. Guy Debelle & Owen Lamont, 1996. "Relative Price Variability and Inflation: Evidence from US Cities," NBER Working Papers 5627, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Viktoria Hnatkovska & Amartya Lahiri & Carlos A. Vegh, 2008. "Interest Rates and the Exchange Rate: A Non-Monotonic Tale," NBER Working Papers 13925, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Pablo Druck & Alexander Plekhanov & Mario Dehesa, 2007. "Relative Price Stability, Creditor Rights, and Financial Deepening," IMF Working Papers 07/139, International Monetary Fund. [Downloadable!]
  3. Pablo Druck & Jorge M. Streb, 2001. "Economic Development as a Matter of Political Geography," CEMA Working Papers: Serie Documentos de Trabajo. 182, Universidad del CEMA. [Downloadable!]
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