Liability Dollarization and the Bank Balance Sheet Channel

Choi, Woon Gyu; Cook, David E.

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Liability Dollarization and the Bank Balance Sheet Channel

IMF Working Paper No. 02/141

27 Pages Posted: 31 Jan 2006

See all articles by Woon Gyu Choi

David E. Cook

Hong Kong University of Science & Technology (HKUST) - Department of Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Date Written: August 2002

Abstract

Banks in developing economies often face a mismatch in the currency denomination of their liabilities (foreign currency denominated debt) and assets (domestic currency loans to domestic borrowers). We study the effect of this mismatch on business cycles and monetary policy in a sticky-price, dynamic general equilibrium model of a small open economy. We find from the model analysis that a fixed exchange rate rule that stabilizes the balance sheets of banks offers greater stability than an interest rate rule that targets inflation in the sticky-price sector of the economy.

Keywords: bank balance sheet channel, foreign currency debt, sticky prices, depreciation

JEL Classification: E52, F41

Suggested Citation: Suggested Citation

Choi, Woon Gyu and Cook, David E., Liability Dollarization and the Bank Balance Sheet Channel (August 2002). IMF Working Paper No. 02/141, Available at SSRN: https://ssrn.com/abstract=879936