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Dollar Shortages and Crises

  • Rajan, Raghuram G.
  • Tokatlidis, Ioannis

Emerging markets do not handle adverse shocks well. In this paper, we lay out an argument about why emerging markets are so fragile, and why they may adopt contractual mechanisms—such as a dollarized banking system—that increase their fragility. We draw on this analysis to explain why dollarized economies may be prone to dollar shortages and twin crises. The model of crises described here differs in some important aspects from what are now termed the first-, second-, and third-generation models of crises. We then examine how domestic policies, especially monetary policy, can mitigate the adverse effects of these crises. Finally, we consider the role, potentially constructive, that international financial institutions may undertake both in helping to prevent the crises and in helping to resolve them.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 832.

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Date of creation: 14 Mar 2005
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Publication status: Published in International Journal of Central Banking Number 2.Volume(2005): pp. 177-220
Handle: RePEc:pra:mprapa:832
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