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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, including through the introduction of currency-specific prudential norms. 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 peso. While quantitative limits on dollarization could also be used to speed up dedollarization, risks could be high.

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File URL: http://www.utdt.edu/departamentos/empresarial/cif/pdfs-wp/wpcif-042004.pdf
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Paper provided by Universidad Torcuato Di Tella in its series Business School Working Papers with number defactodollarization.

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Length: 44 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:udt:wpbsdt:defactodollarization
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Web page: http://www.utdt.edu/listado_contenidos.php?id_item_menu=4994

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  1. McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, vol. 87(2), pages 189-93, May.
  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. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
  4. Broda, Christian & Yeyati, Eduardo Levy, 2006. "Endogenous Deposit Dollarization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 963-988, June.
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  12. De Nicolo, Gianni & Honohan, Patrick & Ize, Alain, 2003. "Dollarization of the banking system : good or bad?," Policy Research Working Paper Series 3116, The World Bank.
  13. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization; The Banking Side," IMF Working Papers 00/146, International Monetary Fund.
  14. 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.
  15. Dooley, Michael P, 2000. "A Model of Crises in Emerging Markets," Economic Journal, Royal Economic Society, vol. 110(460), pages 256-72, January.
  16. 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.
  17. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June.
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