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Prudential Responses to de facto Dollarization

  • Alain Ize
  • Andrew Powell

We present a model that encompasses three distinct motives for dollarization (price volatility, credit risk, and moral hazard) and discuss when risk-based prudential policy responses are called for and the form they should take. We argue that the overall policy response must be tailored to the nature of the dollarization the economy is facing. However, prudential policies should be formulated irrespective of the roots of dollarization. Their aim should be to enhance financial stability by ensuring that banks internalize credit risk within acceptable risk tolerance levels, taking dollarization and the current monetary policy environment as given.

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Article provided by Taylor & Francis Journals in its journal Journal of Economic Policy Reform.

Volume (Year): 8 (2005)
Issue (Month): 4 ()
Pages: 241-262

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Handle: RePEc:taf:jpolrf:v:8:y:2005:i:4:p:241-262
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  1. Douglas Gale & Xavier Vives, 2002. "Dollarization, Bailouts, And The Stability Of The Banking System," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 467-502, May.
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