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Persistence of dollarization after price stabilization

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  • Rappoport, Veronica

Abstract

Credit contracts in developing countries are often denominated in foreign currencies, even after many of these economies succeeded in controlling inflation. This paper proposes a new interpretation of this apparent puzzle based on the demand for insurance against real shocks: the fact that devaluations occur more frequently in adverse states of the world provides a motive for holding dollar assets. This approach implies a complementarity between the optimal monetary policy and the currency denomination of contracts. When a large proportion of liabilities is denominated in a foreign currency, the optimal exchange rate volatility is low, which reinforces the demand for dollar assets.

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  • Rappoport, Veronica, 2009. "Persistence of dollarization after price stabilization," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 979-989, October.
  • Handle: RePEc:eee:moneco:v:56:y:2009:i:7:p:979-989
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    Cited by:

    1. Mora, Nada & Neaime, Simon & Aintablian, Sebouh, 2013. "Foreign currency borrowing by small firms in emerging markets: When domestic banks intermediate dollars," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 1093-1107.
    2. Amat Adarov & Kateryna Bornukova & Rumen Dobrinsky & Peter Havlik & Gabor Hunya & Dzmitry Kruk & Olga Pindyuk, 2016. "The Belarus Economy: The Challenges of Stalled Reforms," wiiw Research Reports 413, The Vienna Institute for International Economic Studies, wiiw.
    3. Luis Catão & Marco Terrones, 2016. "Financial De-Dollarization; A Global Perspective and the Peruvian Experience," IMF Working Papers 16/97, International Monetary Fund.
    4. Castillo, Paul & Vega, Hugo & Serrano, Enrique & Burga, Carlos, 2016. "De-dollarization of credit in Peru: the role of unconventional monetary policy tools," Working Papers 2016-002, Banco Central de Reserva del Perú.
    5. Caglayan, Mustafa & Talavera, Oleksandr, 2016. "Dollarization, liquidity and performance: Evidence from Turkish banking," MPRA Paper 72812, University Library of Munich, Germany.
    6. Marcelin, Isaac & Mathur, Ike, 2016. "Financial sector development and dollarization in emerging economies," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 20-32.

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