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Assessing Financial Vulnerability in Partially Dollarized Economies

Author

Listed:
  • Eduardo Moron

    (Universidad del Pacifico)

  • Juan F. Castro

    (Universidad del Pacifico)

  • Diego Winkelried

    (Banco Central de Reserva del Peru)

Abstract

The reduction of macroeconomic vulnerability in emerging markets is at the core of the research agenda. In this context, liability dollarization plays a vital role and its implications have been addressed in the literature via a “financial accelerator” mechanism. After allowing for different degrees of liability dollarization in a general equilibrium framework, this analysis uncovers some important implications about the role of the asset price channel and central bank’s commitment with the exchange rate, when assessing financial vulnerability. If we asses vulnerability in terms of the evolution of investment, we claim that, in absence of an asset price channel, departures from a pure float will not only help mitigate vulnerability but will also be welfare improving. On the other hand, and with an active asset price channel, a tighter exchange rate policy will only have marginal effects on welfare and vulnerability when compared to that associated to a reduction in liability dollarization.

Suggested Citation

  • Eduardo Moron & Juan F. Castro & Diego Winkelried, 2004. "Assessing Financial Vulnerability in Partially Dollarized Economies," International Finance 0406002, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpif:0406002
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    References listed on IDEAS

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    Cited by:

    1. Juan F. Castro & Eduardo Morón, 2005. "Financial Dollarization and the Size of the Fear," Working Papers 05-03, Centro de Investigación, Universidad del Pacífico.
    2. Renzo Jiménez Sotelo, 2010. "Ciclo crediticio y acelerador cambiario: evidencia empírica y consecuencias para la regulación prudencial," Revista Economía, Fondo Editorial - Pontificia Universidad Católica del Perú, vol. 33(65), pages 133-176.
    3. Carlos Gustavo Machicado, 2006. "Welfare Gains from Optimal Policy in a Partially Dollarized Economy," Development Research Working Paper Series 10/2006, Institute for Advanced Development Studies.
    4. Machicado, Carlos Gustavo, 2008. "Liquidity shocks and the dollarization of a banking system," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 369-381, March.
    5. Carlos Gustavo Machicado, 2007. "Growth and Banking Structure in a Partially Dollarized Economy," Development Research Working Paper Series 02/2007, Institute for Advanced Development Studies.

    More about this item

    Keywords

    Liability dollarization; financial vulnerability; fear of floating; monetary policy;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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