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Dollarization of Liabilities in Non-tradable Goods Sector

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  • Frederic Chabellard

Abstract

This paper questions the motivation of dollar indebtedness by firms of the non-tradable good sectors in a period of exchange rate pressure. Given the structure of banks' indebtedness and protection of banks' foreign lenders, a dollar denominated loan may allow firms to insure (partially) against the risk of an early liquidation of their projects if they turn out to be poor. Then it is shown that under dollarization of liabilities the government may be urged to soften monetary policy to induce a real appreciation that supports the domestic banking system. Therefore, it might be constrained in its ability to enforce an efficient regulatory policy.

Suggested Citation

  • Frederic Chabellard, 2001. "Dollarization of Liabilities in Non-tradable Goods Sector," William Davidson Institute Working Papers Series 380, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2001-380
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    References listed on IDEAS

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    More about this item

    Keywords

    Foreign currency debt; real and nominal exchange rates; soft budget constraints; too many to fail; regulatory forbearance;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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