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

Ize, Alain, Financial Dollarization Equilibria: A Framework for Policy Analysis (September 2005). IMF Working Paper No. 05/186, Available at SSRN: https://ssrn.com/abstract=888055

Alain Ize (Contact Author)

World Bank ( email )

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Washington, DC 20433
United States