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A simple theoretical framework for the analysis of liability dollarization

  • Daniel Heymann - Enrique Kawamura

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

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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 120.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:120
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  1. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  2. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
  3. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
  4. Fischer, Stanley, 1975. "The Demand for Index Bonds," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 509-34, June.
  5. Christian Broda & Eduardo Levy Yeyati, 2003. "Endogenous Deposit Dollarization," Business School Working Papers dieciseis, Universidad Torcuato Di Tella.
  6. Olivier Jeanne, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," IMF Working Papers 03/177, International Monetary Fund.
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