This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Understanding Financial Vulnerability in Partially Dollarized Economies

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Diego Winkelried
Juan Francisco Castro
Eduardo Morón

Additional information is available for the following registered author(s):

Abstract

The reduction of macroeconomic vulnerability in emerging markets is now at the core of the research agenda. Liability dollarization plays a vital role in the understanding of vulnerability and its implications (from a general equilibrium perspective) have been addressed in the literature via the inclusion of a “financial accelerator†mechanism. In particular, its formalization is based on Bernanke’s, et al. (1998) optimal contract, which predicts a negative relation between an external finance premium and firm’s net worth. We can identify two channels by which the financial accelerator can be triggered. The first, emphasized in Bernanke, et al. (1998) and Gertler, et al. (2001), operates via shocks on asset prices which, in turn, affect the realized return on capital and net worth. The second channel, privileged in Céspedes, et al. (2000a y 2000b), depends on unanticipated movements in firm’s debt burden which directly affect their net worth. Not surprisingly, liability dollarization plays an important role in the activation of this second channel since the unexpected component of a real depreciation can greatly magnify the debt burden of firms if their debt is denominated in dollars. Based on this, Céspedes, et al. (2000a y 2000b) present a first approximation to a definition of vulnerability. In particular, an economy is classified as vulnerable if a real exchange rate depreciation implies an increase in the risk premium faced by firms. This result is neatly summarized in the log linear version of the risk premium equation and depends, crucially, on firms indebtness level. Their model, however, assumes complete depreciation and, thus, lacks the asset price channel explained above. Gertler, et al. (2001) recognize this issue and present some simulations using dollar denominated debt and an active asset price mechanism. Despite these significant contributions to the understanding of the consequences of liability dollarization for output fluctuations, we believe some important extensions are now in order: (i) if we want to address the implications of the degree of dollarization, we need a general equilibrium model that admits firm’s debt to be denominated in both local and foreign currency (the two models just described assume full liability dollarization); (ii) central bank’s response to exchange rate innovations (given a degree of dollarization) must be assessed from a welfare point of view; and (iii) given a dollarization level and central bank’s response to shocks, a new, encompassing, definition of vulnerability must be provided in order to adequately address the way in which it can be mitigated

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.docentes.up.edu.pe/EMoron/CMW_2004.pdf
File Format: application/pdf
File Function: main text
Download Restriction: no

Publisher Info
Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 260.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: 11 Aug 2004
Date of revision:
Handle: RePEc:ecm:latm04:260

Contact details of provider:
Phone: 1 212 998 3820
Fax: 1 212 995 4487
Email:
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Christopher F. Baum).

Related research
Keywords: Financial vulnerability; Dollarization; Monetary Policy;

Other versions of this item:

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier. [Downloadable!] (restricted)
    Other versions:
  2. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September. [Downloadable!] (restricted)
  3. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
    Other versions:
  5. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Eduardo Morón & Diego Winkelried, 2003. "Monetary Policy Rules for Financially Vulnerable Economies," IMF Working Papers 03/39, International Monetary Fund. [Downloadable!]
    Other versions:
  7. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March. [Downloadable!] (restricted)
  8. Christian Broda & Eduardo Levy Yeyati, 2003. "Endogenous deposit dollarization," Staff Reports 160, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  9. Ivan Tchakarov & Selim Elekdag, 2004. "Balance Sheets, Exchange Rate Policy, and Welfare," IMF Working Papers 04/63, International Monetary Fund. [Downloadable!]
  10. Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2001. "External constraints on monetary policy and the financial accelerator," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
    Other versions:
  11. Eduardo Moron & Juan F. Castro, 2003. "Dedollarizing the Peruvian Economy," Macroeconomics 0312005, EconWPA. [Downloadable!]
  12. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October. [Downloadable!] (restricted)
    Other versions:
  13. Marco Vega & Diego Winkelried, 2004. "How Does Global Disinflation Drag Inflation in Small Open Economies?," Macroeconomics 0403008, EconWPA. [Downloadable!]
    Other versions:
  14. Alain Ize & Eduardo Levy Yeyati, 1998. "Dollarization of Financial Intermediation: Causes and Policy Implications," IMF Working Papers 98/28, International Monetary Fund.
Full references

Statistics
Access and download statistics

Did you know? IDEAS also indexes books.

This page was last updated on 2009-12-2.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.