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Assessing Financial Vulnerability in Partially Dollarized Economies

  • Eduardo Moron

    (Universidad del Pacifico)

  • Juan F. Castro

    (Universidad del Pacifico)

  • Diego Winkelried

    (Banco Central de Reserva del Peru)

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.

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File URL: http://econwpa.repec.org/eps/if/papers/0406/0406002.pdf
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Paper provided by EconWPA in its series International Finance with number 0406002.

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Length: 30 pages
Date of creation: 01 Jun 2004
Date of revision:
Handle: RePEc:wpa:wuwpif:0406002
Note: Type of Document - pdf; pages: 30
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  2. Eduardo Moron & Diego Winkelried, 2002. "Monetary Policy Rules for Financially Vulnerable EconomieEd," Macroeconomics 0205001, EconWPA.
  3. Marco Vega & Diego Winkelreid, 2005. "How Does a Global Disinflation Drag Inflation in Small Open Economies?," Working Papers 2005-001, Banco Central de Reserva del Perú.
  4. Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2001. "External constraints on monetary policy and the financial accelerator," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  5. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
  6. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  7. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  8. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
  9. Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers 638, Stockholm - International Economic Studies.
  10. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September.
  11. Christian Broda & Eduardo Levy Yeyati, 2003. "Endogenous Deposit Dollarization," Business School Working Papers dieciseis, Universidad Torcuato Di Tella.
  12. Selim Elekdag & Ivan Tchakarov, 2004. "Balance Sheets, Exchange Rate Policy, and Welfare," IMF Working Papers 04/63, International Monetary Fund.
  13. Eduardo Moron & Juan F. Castro, 2003. "Dedollarizing the Peruvian Economy," Macroeconomics 0312005, EconWPA.
  14. Eduardo Levy Yeyati & Alain Ize, 1998. "Dollarization of Financial Intermediation; Causes and Policy Implications," IMF Working Papers 98/28, International Monetary Fund.
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