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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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File URL: http://www.bcrp.gob.pe/docs/Publicaciones/Documentos-de-Trabajo/2012/documento-de-trabajo-02-2012.pdf
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Bibliographic Info

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. Ethan Cohen-Cole & Enrique Martinez-Garcia, 2009. "The Balance Sheet Channel," Working Papers Central Bank of Chile 537, Central Bank of Chile.
  2. 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.
  3. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and Banking in a DSGE Model of the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 107-141, 09.
  4. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  5. 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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