Banking and the Political Support for Dollarization

FRB Richmond Working Paper No. 00-12

31 Pages Posted: 28 Nov 2012

See all articles by Huberto M. Ennis

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: December 1, 2000

Abstract

In this paper we study dollarization as a commitment device that the Central Bank could use to avoid getting involved in an undesirable banking-sector bailout. We show how a political process could induce an equilibrium outcome that differs from the one that a benevolent Central Bank would want to implement. Dollarization then could be used to restore the economy to the benevolent outcome. In so doing though, political support for dollarization becomes essential. For our benchmark case, dollarization does not have enough support to be actually implemented. But when we study the interaction among dollarization, the introduction of international banks, and the political process, we find that bank internationalization may help to attain the necessary political support that can make dollarization a viable policy.

Keywords: dollarization, political equilibrium, banking bailouts

JEL Classification: E58, F30, G21

Suggested Citation

Ennis, Huberto M., Banking and the Political Support for Dollarization (December 1, 2000). FRB Richmond Working Paper No. 00-12. Available at SSRN: https://ssrn.com/abstract=2126779 or http://dx.doi.org/10.2139/ssrn.2126779

Huberto M. Ennis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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