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A simple theoretical framework for the analysis of liability dollarization

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  • Daniel Heymann - Enrique Kawamura

Abstract

This paper presents a simple model of debt contracts in order to analyze the conditions under which domestic residents would choose to denominate debts in ``dollars''. In the model, borrowers are producers of non-traded goods, and subject to shocks on prices. The real exchange rate varies in response to real shocks. There is a domestic unit of account; prices in terms of that unit can be shocked by a (presumably policy - induced) disturbance. Debt obligations can be denominated in either traded goods (dollarized contracts) or local currency. When real and nominal shocks are possitively correlated, dollarized contracts tend to be preferable to (non-contingent) nominal contracts when nominal shocks are large and real shocks are small

Suggested Citation

  • Daniel Heymann - Enrique Kawamura, 2004. "A simple theoretical framework for the analysis of liability dollarization," Econometric Society 2004 Latin American Meetings 120, Econometric Society.
  • Handle: RePEc:ecm:latm04:120
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    File URL: http://repec.org/esLATM04/up.9590.1081803429.pdf
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    References listed on IDEAS

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    1. Broda, Christian & Yeyati, Eduardo Levy, 2006. "Endogenous Deposit Dollarization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 963-988, June.
    2. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    3. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-534, June.
    4. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
    5. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
    6. Olivier D Jeanne, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," IMF Working Papers 03/177, International Monetary Fund.
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    Cited by:

    1. Jorge Carrera & Luis N. Lanteri, 2007. "Macroeconomic Shocks and Financial Vulnerability," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(48), pages 13-71, July - Se.

    More about this item

    Keywords

    Liability Dollarization; Nominal and Real Shocks.;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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