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Liability dollarization and fear of floating

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  • Nguyen, Quoc Hung

Abstract

This paper explores the idea that fear of floating can be justified as an optimal discretionary monetary policy in a dollarized emerging economy. Specifically, I consider a small open economy in which intermediate goods importers borrow in foreign currency and face a credit constraint. In this economy, exchange rate depreciation not only worsens importers' net-worth but also increases the financing amount in domestic currency, therefore exaggerating their borrowing finance premium. Besides, because of high exchange rate pass-through into import prices, fluctuations in the exchange rate also have strong impacts on domestic prices and production. These effects, together, magnify the macroeconomic consequences of the floating exchange rate policy in response to external shocks. The paper shows that the floating exchange rate regime is dominated by the fixed exchange rate regime in the role of cushioning shocks and in welfare terms.

Suggested Citation

  • Nguyen, Quoc Hung, 2010. "Liability dollarization and fear of floating," IDE Discussion Papers 247, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  • Handle: RePEc:jet:dpaper:dpaper247
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    File URL: https://ir.ide.go.jp/?action=repository_action_common_download&item_id=37924&item_no=1&attribute_id=22&file_no=1
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    1. repec:eee:riibaf:v:42:y:2017:i:c:p:149-160 is not listed on IDEAS

    More about this item

    Keywords

    Developing countries; Foreign exchange; Exchange control; Liability Dollarization; Fear of Floating; Imported Goods;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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