Banks with Peso-Dominated Deposits in Small Open Economies with Aggregate Liquidity Shocks
AbstractI extend the traditional Diamond Dybvig framework with aggregate liquidity shocks to small open economies. Currency board may imply perfect risk sharing (with perfect credit markets), contrary to Chang and Velasco’s …ndings (2000). With interim-date borrowing constraints and …xed exchange rates, Wallace’ s (1990) partial suspension of convertibility of deposits is obtained. A banking system with an international lender may implement both allocations without runs. Flexible exchange rates with local-currency denominated deposits improves risk sharing relative to …xed exchange rates when borrowing constraints are present. It also avoids equilibrium bank runs.
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Bibliographic InfoPaper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 27.
Length: 38 pages
Date of creation: Oct 2000
Date of revision: Jun 2002
banks; deposits; small open economies; liquidity; shocks;
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