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Financial Frictions and the Interest-Rate Differential in a Dollarized Economy

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  • Vega, Hugo

    (Banco Central de Reserva del Perú
    London School of Economics)

Abstract

This paper presents a partial equilibrium characterization of the credit market in an economy with partial financial dollarization. Financial frictions, in the form of costly state veri cation and banking regulation restrictions, are introduced and their impact on lending and deposit interest rates denominated in domestic and foreign currency studied. The analysis shows that reserve requirements act as a tax that leads banks to decrease deposit rates, while the wedge between foreign and domestic currency lending rates is decreasing in exchange rate volatility and increasing in the degree of correlation between entrepreneur’s returns and the exchange rate.

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Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2012-002.

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Date of creation: Jan 2012
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Handle: RePEc:rbp:wpaper:2012-002

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  1. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and banking in a DSGE model of the euro area," Temi di discussione (Economic working papers) 740, Bank of Italy, Economic Research and International Relations Area.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  3. Ethan Cohen-Cole & Enrique Martinez-Garcia, 2008. "The balance sheet channel," Risk and Policy Analysis Unit Working Paper QAU08-7, Federal Reserve Bank of Boston.
  4. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
  5. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  6. Ignazio Angeloni & Ester Faia, 2009. "A Tale of Two Policies: Prudential Regulation and Monetary Policy with Fragile Banks," Kiel Working Papers 1569, Kiel Institute for the World Economy.
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Cited by:
  1. Vega, Hugo, 2012. "Fricciones financieras y el diferencial de tasas de interés en una economía dolarizada," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 24, pages 9-26.

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