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A simple theoretical framework for the analysis of liability dollarization

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  • Daniel Heymann - Enrique Kawamura

Abstract

This paper presents a simple model of debt contracts in order to analyze the conditions under which domestic residents would choose to denominate debts in ``dollars''. In the model, borrowers are producers of non-traded goods, and subject to shocks on prices. The real exchange rate varies in response to real shocks. There is a domestic unit of account; prices in terms of that unit can be shocked by a (presumably policy - induced) disturbance. Debt obligations can be denominated in either traded goods (dollarized contracts) or local currency. When real and nominal shocks are possitively correlated, dollarized contracts tend to be preferable to (non-contingent) nominal contracts when nominal shocks are large and real shocks are small

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File URL: http://repec.org/esLATM04/up.9590.1081803429.pdf
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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 120.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:120

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Keywords: Liability Dollarization; Nominal and Real Shocks.;

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  1. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
  2. Christian Broda & Eduardo Levy Yeyati, 2003. "Endogenous deposit dollarization," Staff Reports 160, Federal Reserve Bank of New York.
  3. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-34, June.
  4. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  5. Olivier Jeanne, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," IMF Working Papers 03/177, International Monetary Fund.
  6. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
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Cited by:
  1. Jorge Carrera & Luis N. Lanteri, 2007. "Macroeconomic Shocks and Financial Vulnerability," BCRA Working Paper Series 200717, Central Bank of Argentina, Economic Research Department.

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