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Prudential Responses to De Facto Dollarization

  • Alain Ize
  • Andrew Powell

We develop a theoretical framework that encompasses four distinct motives for dollarization and discuss appropriate policy responses to help contain dollarization and its attendant risks. "Moral hazard" dollarization provides a clear case for prudential policy activism. However, prudential reform will have only a limited impact on dollarization when the main culprits are fear of floating and lack of monetary credibility. In such cases, a concerted and comprehensive reform agenda, including market-oriented and institutional reforms, would be needed to shift the balance of risks in favor of the domestic currency. While quantitative limits on dollarization could also be used to speed up de-dollarization, risks could be high.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/66.

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Length: 41
Date of creation: 01 Apr 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/66
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  1. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
  2. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1999. "Hedging and Financial Fragility in Fixed Exchange Rate Regimes," NBER Working Papers 7143, National Bureau of Economic Research, Inc.
  3. Gale, Douglas M & Vives, Xavier, 2001. "Dollarization, Bailouts and the Stability of the Banking System," CEPR Discussion Papers 2901, C.E.P.R. Discussion Papers.
  4. Ricardo J. Caballero & Arvind Krishnamurthy, 2003. "Excessive Dollar Debt: Financial Development and Underinsurance," Journal of Finance, American Finance Association, vol. 58(2), pages 867-894, 04.
  5. Broda, Christian & Yeyati, Eduardo Levy, 2006. "Endogenous Deposit Dollarization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 963-988, June.
  6. Marcus Miller & Joseph Stiglitz, 1999. "Bankruptcy Protection Against Macroeconomics Shocks: The case for a 'super Chapter 11'," CSGR Hot Topics: Research on Current Issues 08, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  7. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
  8. Martin Schneider & Aaron Tornell, 2000. "Balance SHeet Effects, Bailout Guarantees and Financial Crises," NBER Working Papers 8060, National Bureau of Economic Research, Inc.
  9. Cowan, kevin & Quy-Toan Do, 2003. "Financial dollarization and central bank credibility," Policy Research Working Paper Series 3082, The World Bank.
  10. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
  11. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June.
  12. Michael P. Dooley, 1998. "A model of crises in emerging markets," International Finance Discussion Papers 630, Board of Governors of the Federal Reserve System (U.S.).
  13. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
  14. McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, vol. 87(2), pages 189-93, May.
  15. Gianni De Nicoló & Patrick Honohan & Alain Ize, 2003. "Dollarization of the Banking System: Good or Bad?," IMF Working Papers 03/146, International Monetary Fund.
  16. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization: The Banking Side," IMF Working Papers 00/146, International Monetary Fund.
  17. Guillermo A. Calvo & Pablo E. Guidotti, 1990. "Credibility and Nominal Debt: Exploring the Role of Maturity in Managing Inflation," IMF Staff Papers, Palgrave Macmillan, vol. 37(3), pages 612-635, September.
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