Banking and the political support for dollarization

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Banking and the political support for dollarization

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Huberto M. Ennis

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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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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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This paper has been announced in the following NEP Reports:

NEP-ALL-2001-04-02 (All new papers)
NEP-IFN-2001-04-02 (International Finance)
NEP-MON-2001-04-02 (Monetary Economics)

References listed on IDEAS
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Francois R. Velde & Marcelo Veracierto, 2000. "Dollarization in Argentina," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 24-37. [Downloadable!]
Other versions:
- Francois R. Velde & Marcelo Veracierto, 1999. "Dollarization in Argentina," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Jun. [Downloadable!]
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. [Downloadable!]
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Other versions:
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- Roberto Chang & Andres Velasco, 1998. "The Asian liquidity crisis," Working Paper 98-11, Federal Reserve Bank of Atlanta. [Downloadable!]
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Other versions:
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Other versions:
- Craig Burnside & Martin Eichenbaum & Sergio T. Rebelo, 2000. "On the Fundamentals of Self-Fulfilling Speculative Attacks," NBER Working Papers 7554, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Other versions:
- Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "Stabilization Policy and the Costs of Dollarization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 482-509, May.
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Other versions:
- 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.). [Downloadable!]
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Other versions:
- Peck, James & Shell, Karl, 2001. "Equilibrium Bank Runs," Working Papers 01-10r, Cornell University, Center for Analytic Economics. [Downloadable!]

Full references

Cited by:
(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.)

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. [Downloadable!]

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