Assessing Financial Vulnerability in Partially Dollarized Economies

30 Pages Posted: 24 May 2004

See all articles by Juan F. Castro

Juan F. Castro

Universidad del Pacifico, Peru - Department of Economics

Eduardo A. Morón

Universidad del Pacifico, Peru - Department of Economics

Diego Winkelried

University of Cambridge - Faculty of Economics and Politics; Central Reserve Bank of Peru

Date Written: May 20, 2004

Abstract

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.

Keywords: Liability dollarization, financial vulnerability, fear of floating, monetary policy

JEL Classification: C68, E52, F41

Suggested Citation

Castro, Juan Francisco and Morón, Eduardo A. and Winkelried, Diego, Assessing Financial Vulnerability in Partially Dollarized Economies (May 20, 2004). Available at SSRN: https://ssrn.com/abstract=549443 or http://dx.doi.org/10.2139/ssrn.549443

Juan Francisco Castro

Universidad del Pacifico, Peru - Department of Economics ( email )

Av. Salaverry 2020
Lima
Peru

Eduardo A. Morón (Contact Author)

Universidad del Pacifico, Peru - Department of Economics ( email )

Av. Salaverry 2020
Lima 11
Peru
511-219 0100 (Phone)
511-219 0135 (Fax)

Diego Winkelried

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

Central Reserve Bank of Peru ( email )

Miroquesada 411
Lima
Peru

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