Financial Dedollarization: A Carrot and Stick Approach
22 Pages Posted: 16 Jun 2003
Date Written: May 29, 2003
Abstract
Financial dollarization (the holding by residents of foreign currency-denominated assets and liabilities) inevitably introduces a currency imbalance for the economy as a whole, amplifying the impact of real shocks. For this reason, it has been placed increasingly at the forefront of the policy debate in emerging economies. This paper argues that a successful strategy to reverse financial dollarization involves a two-way approach that includes: i) the adaptation of the prudential framework to address the externalities that tend to favor financial dollarization through the underpricing of real exchange rate risk, and ii) the development of domestic markets for local-currency substitutes to mitigate the impact of the currency switch on the domestic cost of funds. The paper discusses the main aspects associated with these two components and the menu of policy options in each case.
Keywords: Dollarization, balance sheet effects, currency crisis, emerging markets
JEL Classification: F30, F31, F33, G28
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Balance Sheet Effects, Bailout Guarantees and Financial Crises
By Martin Schneider and Aaron Tornell
-
Hedging and Financial Fragility in Fixed Exchange Rate Regimes
By A. Craig Burnside, Martin Eichenbaum, ...
-
By Francis E. Warnock and John D. Burger
-
By John D. Burger and Francis E. Warnock
-
Emerging Local Currency Bond Markets
By John D. Burger, Francis E. Warnock, ...
-
Why Do Emerging Market Economies Borrow in Foreign Currency?
-
Foreign Participation in Local Currency Bond Markets
By John D. Burger and Francis E. Warnock
-
Foreign Participation in Local-Currency Bond Markets
By Francis E. Warnock and John D. Burger
-
A Corporate Balance Sheet Approach to Currency Crises
By Philippe Aghion, Abhijit V. Banerjee, ...