Financial Dollarization Equilibria: A Framework for Policy Analysis
30 Pages Posted: 3 Mar 2006
Date Written: September 2005
Abstract
Rapidly rising dollarization and numerous related financial crises in recent years have heightened the need for policy action. This paper contributes to the policy debate by presenting a common analytic framework that examines the roots of de facto financial dollarization under different economic environments and analyzes its interplay with monetary and prudential policies. In addition to providing a systematic analysis of the existence, stability, and multiplicity of dollarization equilibria, the paper makes a few novel contributions. In particular, it stresses the key role played by monetary policy endogeneity and identifies the underlying determinants of the peso premium that are responsible for inducing a preference for the dollar in financial transactions.
Keywords: Dollarization, Monetary policy, Credit risk
JEL Classification: E50, G11, G20
Suggested Citation: Suggested Citation
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