Excessive Liability Dollarization in a Simple Signaling Model
If a dollar denominated external debt comes with so many risks, why do emerging economies allow for such an imbalance to accumulate ? The explanation provided in this paper builds on a simple signaling model. By assumption, lenders have no direct possibility to infer a firm’s financial stance. Therefore sound firms might want to borrow dollars and bear a high clearance cost, just in order to signal their type. The success of this policy depends on the behavior of bad firms. When dollar borrowing clearance costs are relatively small with respect to the clearance cost of borrowing in the local currency, the whole private sector would opt for liability dollarization. In this case the signaling effect vanishes, while all firms bear high clearance costs.
|Date of creation:||Jan 2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.essec.edu/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003.
"Addicted to Dollars,"
NBER Working Papers
10015, National Bureau of Economic Research, Inc.
- Guillermo A. Calvo & Carmen M. Reinhart, 2000.
"Fear of Floating,"
NBER Working Papers
7993, National Bureau of Economic Research, Inc.
- Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
- repec:imf:imfwpa:02/234 is not listed on IDEAS
- Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2000.
"Currency Crises and Monetary Policy in an Economy with Credit Constraints,"
00.07, Swiss National Bank, Study Center Gerzensee.
- Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
- Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2000. "Currency Crises and Monetary Policy in an Economy with Credit Constraints," CEPR Discussion Papers 2529, C.E.P.R. Discussion Papers.
- Banerjee, Abhijit & Bacchetta, Philippe & Aghion, Philippe, 2001. "Currency Crises and Monetary Policy in an Economy with Credit Constraints," Scholarly Articles 4554218, Harvard University Department of Economics.
- Besancenot, Damien & Vranceanu, Radu, 2003. "Financial Instability under Floating Exchange Rates," ESSEC Working Papers DR 03011, ESSEC Research Center, ESSEC Business School.
- Ricardo J. Caballero & Arvind Krishnamurthy, 2000. "Dollarization of Liabilities: Underinsurance and Domestic Financial Underdevelopment," NBER Working Papers 7792, National Bureau of Economic Research, Inc.
- Barry Eichengreen & Ricardo Hausmann, 1999.
"Exchange Rates and Financial Fragility,"
NBER Working Papers
7418, National Bureau of Economic Research, Inc.
- Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
- Jeanne, Olivier, 2000. "Foreign currency debt and the global financial architecture," European Economic Review, Elsevier, vol. 44(4-6), pages 719-727, May.
- Paul Krugman, 2000. "Crises : the price of globalization?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 75-106.
- Cowan, kevin & Quy-Toan Do, 2003. "Financial dollarization and central bank credibility," Policy Research Working Paper Series 3082, The World Bank.
- repec:rus:hseeco:123906 is not listed on IDEAS
- Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
- Kenneth Rogoff, 1999.
"International Institutions for Reducing Global Financial Instability,"
Journal of Economic Perspectives,
American Economic Association, vol. 13(4), pages 21-42, Fall.
- Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," NBER Working Papers 7265, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:ebg:essewp:dr-04001. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sophie Magnanou)
If references are entirely missing, you can add them using this form.