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Dollar Shortages and Crises

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Author Info
Raghuram G. Rajan

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Abstract

Emerging markets do not handle adverse shocks well. In this paper, I will outline an explanation of why emerging markets are so fragile, and why they may adopt contractual mechanisms -- such as a dollarized banking system -- that increase their fragility. I draw on this analysis to explain why dollarized economies may be prone to dollar shortages and twin crises. The model of crises described here differs in some important aspects from what is now termed the first, second, and third generation models of crises. I then examine how domestic policies, especially monetary policy, can mitigate the adverse effects of these crises. Finally, I will ask if there is a constructive role for international financial institutions both in helping to prevent the crises and in helping resolve them.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10845.

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Date of creation: Oct 2004
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Handle: RePEc:nbr:nberwo:10845

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Find related papers by JEL classification:
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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References listed on IDEAS
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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.)

  1. Eduardo Levy Yeyati, 2006. "Liquidity Insurance in a Financially Dollarized Economy," Business School Working Papers liquid, Universidad Torcuato Di Tella. [Downloadable!]
    Other versions:
  2. Emre Ozsoz & Erick W. Rengifo & Dominick Salvatore, 2008. "Dollarization as an Investment Signal in Developing Countries: The Case of Croatia, Czech Republic, Peru, Slovak Republic and Turkey," Fordham Economics Discussion Paper Series dp2008-16, Fordham University, Department of Economics. [Downloadable!]
  3. Douglas W. Diamond & Raghuram G. Rajan, 2003. "Money in a Theory of Banking," NBER Working Papers 10070, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Eswar S. Prasad & Raghuram Rajan, 2008. "A Pragmatic Approach to Capital Account Liberalization," NBER Working Papers 14051, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Ashoka Mody & Se-Jik Kim, 2005. "Managing Confidence in Emerging Market Bank Runs," IMF Working Papers 04/235, International Monetary Fund. [Downloadable!]
  6. Levy-Yeyati, Eduardo & Sturzenegger, Federico & Reggio, Iliana, 2006. "On the Endogeneity of Exchange Rate Regimes," Working Paper Series rwp06-047, Harvard University, John F. Kennedy School of Government. [Downloadable!]
    Other versions:
  7. Bank for International Settlements, 2009. "Capital flows and emerging market economies," CGFS Papers, Bank for International Settlements, number 33, April. [Downloadable!]
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