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Managing Systemic Liquidity Risk in Financially Dollarized Economy

Author

Listed:
  • Alain Ize
  • Miguel Kiguel
  • Eduardo Levy Yeyati

Abstract

This paper evaluates ways to protect highly dollarized banking systems from systemic liquidity runs (such as the ones that took place recently in Argentina, Uruguay, and Paraguay). In view of the limitations of available (private or official) insurance schemes, and the distortions introduced by central bank lending of last resort (LOLR), the authors favor decentralized liquid foreign asset requirements on dollar deposits, supplemented by a scheme of “circuit breakers.” The latter combines the use of limited dollar liquidity to ensure the convertibility of transactional deposits with a mechanism that automatically limits the convertibility of dollar term deposits once triggered by a predetermined decline in banks’ liquidity.

Suggested Citation

  • Alain Ize & Miguel Kiguel & Eduardo Levy Yeyati, 2005. "Managing Systemic Liquidity Risk in Financially Dollarized Economy," Business School Working Papers managsystrisk, Universidad Torcuato Di Tella.
  • Handle: RePEc:udt:wpbsdt:managsystrisk
    as

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    File URL: http://www.utdt.edu/departamentos/empresarial/cif/pdfs-wp/wpcif-042005.pdf
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    References listed on IDEAS

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    Cited by:

    1. International Monetary Fund, 2006. "Nicaragua; Selected Issues," IMF Staff Country Reports 2006/173, International Monetary Fund.
    2. Antonio Garcia Pascual & Jorge Cayazzo & Socorro Heysen & Eva Gutierrez, 2006. "Toward An Effective Supervision of Partially Dollarized Banking Systems," IMF Working Papers 2006/032, International Monetary Fund.

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