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Managing Systemic Liquidity Risk in Financially Dollarized Economies

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Author Info

  • Eduardo Levy Yeyati
  • Alain Ize
  • Miguel A. Kiguel

Abstract

This paper evaluates ways to protect highly dollarized banking systems from systemic liquidity runs (such as the ones that took place recently in Argentina, Uruguay, and Paraguay). In view of the limitations of available (private or official) insurance schemes, and the distortions introduced by central bank lending of last resort (LOLR), the authors favor decentralized liquid foreign asset requirements on dollar deposits, supplemented by a scheme of "circuit breakers." The latter combines the use of limited dollar liquidity to ensure the convertibility of transactional deposits with a mechanism that automatically limits the convertibility of dollar term deposits once triggered by a predetermined decline in banks'' liquidity.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/188.

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Length: 31
Date of creation: 01 Sep 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/188

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Related research

Keywords: Dollarization; Bank soundness; Banking systems; central bank; banking; banking system; liquid reserves; bank runs; bank reserves; free banking; bank deposits; reserve holdings; central banks; liquidity crises; banking crises; bank failures; banking sector; currency risk; sovereign risk; domestic currency; foreign asset; sovereign debt; external debt; bank ? safety net; deposit insurance; currency board; international reserve; borrowing cost; bank ? safety; banking panics; public debt; excess liquidity; bank panics; interbank market; repayment capacity; debt crisis; narrow banking; external debt service; bank accounts; bank liquidation; reserve bank; banking law; bank obligations; currency mismatch; bank regulation; bank bonds; bank contracts; banking sectors; bank debt; bank lending; domestic debt; bank assets; banks ? balance sheets; bank closure; debt crises; currency crisis; bank panic; foreign exchange; amount of debt; banking crisis; balance of payments; banks ? assets; segmentation; stock of debt; debt market; liquid asset; bank losses; bank closures; banking environment; debt service; domestic debt market; currency crises;

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References

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  1. Tito Cordella & Eduardo Levy Yeyati, 2004. "Country Insurance," Business School Working Papers countryinsurance, Universidad Torcuato Di Tella.
  2. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
  3. Freixas, Xavier & Parigi, Bruno M. & Rochet, Jean-Charles, 2003. "The lender of last resort: a 21st century approach," Working Paper Series 0298, European Central Bank.
  4. Anne Marie Gulde & David S. Hoelscher & Alain Ize & David Marston & Gianni De Nicoló, 2004. "Financial Stability in Dollarized Economies," IMF Occasional Papers 230, International Monetary Fund.
  5. Ricardo Caballero & Stavros Panageas, 2005. "Contingent Reserves Management: An Applied Framework," Working Papers Central Bank of Chile 329, Central Bank of Chile.
  6. Eduardo Levy Yeyati & Maria Soledad Martinez Peria & Sergio Schmukler, 2004. "Market Discipline in Emerging Economies: Beyond Bank Fundamentals," Business School Working Papers marketdiscipline, Universidad Torcuato Di Tella.
  7. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  8. Gerald P. Dwyer, Jr. & Iftekhar Hasan, 1996. "Suspension of payments, bank failures, and the nonbank public's losses," Working Paper 96-3, Federal Reserve Bank of Atlanta.
  9. Alain Ize, 2005. "Capitalizing Central Banks," IMF Working Papers 05/15, International Monetary Fund.
  10. Cowen, Tyler & Kroszner, Randall, 1989. "Scottish Banking before 1845: A Model for Laissez-Faire?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(2), pages 221-31, May.
  11. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
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Citations

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Cited by:
  1. Eduardo Levy Yeyati & Alain Ize, 2005. "Financial De-Dollarization," IMF Working Papers 05/187, International Monetary Fund.
  2. Eduardo Levy Yeyati, 2006. "Liquidity Insurance in a Financially Dollarized Economy," NBER Working Papers 12345, National Bureau of Economic Research, Inc.
  3. Åke Lönnberg & Luis Ignacio Jácome, 2010. "Implementing official Dollarization," IMF Working Papers 10/106, International Monetary Fund.
  4. KAMGNA, Severin Yves & Ndambendia, Houdou, 2008. "Excès de liquidité systémique et effectivité de la politique monétaire : cas des pays de la CEMAC
    [Excess liquidity and monetary policy effectiveness: The case of CEMAC countries]
    ," MPRA Paper 9599, University Library of Munich, Germany.

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