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Banking and the political support for dollarization

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  • Huberto M. Ennis

Abstract

In this paper we study dollarization as a commitment device that the Central Bank could use to avoid getting involved in an undesirable banking-sector bailout. We show how a political process could induce an equilibrium outcome that differs from the one that a benevolent Central Bank would want to implement. Dollarization then could be used to restore the economy to the benevolent outcome. In so doing though, political support for dollarization becomes essential. For our benchmark case, dollarization does not have enough support to be actually implemented. But when we study the interaction among dollarization, the introduction of international banks, and the political process, we find that bank internationalization may help to attain the necessary political support that can make dollarization a viable policy.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 00-12.

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Date of creation: 2000
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Handle: RePEc:fip:fedrwp:00-12

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Related research

Keywords: Bank failures ; Dollar ; Currency convertibility;

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References

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  1. Cooley, Thomas F & Quadrini, Vincenzo, 2001. "The Cost of Losing Monetary Independence: The Case of Mexico," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 370-97, May.
  2. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  3. Francois R. Velde & Marcelo Veracierto, 2000. "Dollarization in Argentina," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 24-37.
  4. Roberto Chang & Andres Velasco, 1998. "The Asian liquidity crisis," Working Paper 98-11, Federal Reserve Bank of Atlanta.
  5. Stephanie Schmitt-Grohe & Martin Uribe, 2000. "Stabilization Policy and the Costs of Dollarization," Departmental Working Papers 200006, Rutgers University, Department of Economics.
  6. Burnside, A Craig & Eichenbaum, Martin & Rebelo, Sérgio, 2000. "On the Fundamentals of Self-Fulfilling Speculative Attacks," CEPR Discussion Papers 2565, C.E.P.R. Discussion Papers.
  7. Eduardo Borensztein & Andrew Berg, 2000. "The Pros and Cons of Full Dollarization," IMF Working Papers 00/50, International Monetary Fund.
  8. Huberto M. Ennis, 2000. "Loanable Funds, Monitoring and Banking," Center for Financial Institutions Working Papers 00-21, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. David T. Beers & Thomas J. Sargent & Neil Wallace, 1983. "Speculations about the speculation against the Hong Kong dollar," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  10. Peck, James & Shell, Karl, 2001. "Equilibrium Bank Runs," Working Papers 01-10r, Cornell University, Center for Analytic Economics.
  11. Preston J. Miller, 1983. "Budget deficit mythology," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  12. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1997. "Politico-economic equilibrium and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 243-272, January.
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Cited by:
  1. Gaetano Antinolfi & Todd Keister, 2001. "Dollarization as a monetary arrangement for emerging market economies," Review, Federal Reserve Bank of St. Louis, issue Nov., pages 29-40.

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