Excessive Liability Dollarization in a Simple Signaling Model
AbstractIf a dollar denominated external debt comes with so many risks, why do emerging economies allow for such an imbalance to accumulate ? The explanation provided in this paper builds on a simple signaling model. By assumption, lenders have no direct possibility to infer a firm’s financial stance. Therefore sound firms might want to borrow dollars and bear a high clearance cost, just in order to signal their type. The success of this policy depends on the behavior of bad firms. When dollar borrowing clearance costs are relatively small with respect to the clearance cost of borrowing in the local currency, the whole private sector would opt for liability dollarization. In this case the signaling effect vanishes, while all firms bear high clearance costs.
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Bibliographic InfoPaper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number DR 04001.
Length: 26 pages
Date of creation: Jan 2004
Date of revision:
Original sin; Signaling; Developing countries; Liability dollarization; Perfect Bayesian Equilibrium;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
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