Why do firms and banks hold foreign
currency denominated liabilities? The authors argue that
foreign currency debt, by altering the effect of a
devaluation on output, has a disciplining effect when the
Central Bank's objectives differ from the social
optimum. However, under imperfect information, bad priors
about the Central Bank induce excess dollarization of
liabilities, which in turn limits the ability of the Central
Bank to conduct an optimal monetary policy. In addition the
economy may become stuck in a "dollarization trap"
in which dollarized liabilities limit the ability of agents
to learn the true type of the monetary authority. The model
has clear-cut policy implications regarding the taxation of
foreign currency liabilities as a way to encourage perfect
information and avoid dollarization traps. Moreover, it
reinforces the existing argument for Central Bank
independence. Finally, the authors believe this model to be
consistent with a growing empirical literature on the
determinants of foreign currency liabilities and their
relationships to Central Bank credibility.
Bibliographic Details
| Main Authors: |
Cowan, Kevin,
Do, Quy-Toan |
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| Format: | Policy Research Working Paper
biblioteca
|
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| Language: | English
en_US |
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| Published: |
World Bank, Washington, DC
2003-06
|
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| Subjects: | DOLLAR STANDARD,
CENTRAL BANKS,
FOREIGN CURRENCY DEPOSIT ACCOUNTS,
MONETARY POLICY,
INFORMATION ACCOUNTING,
ADVERSE EFFECTS,
AGGREGATE DEMAND,
ARBITRAGE,
AVERAGE INFLATION,
BALANCE SHEETS,
BORROWING,
CAPACITY BUILDING,
CAPITAL ACCOUNT,
CENTRAL BANK,
CENTRAL BANK CREDIBILITY,
COMPETITIVENESS,
DEBT,
DEPOSITS,
DEVALUATION,
DISTORTIONARY EFFECTS,
EMERGING ECONOMIES,
EMPIRICAL EVIDENCE,
EQUILIBRIUM,
EQUILIBRIUM ANALYSIS,
EXCHANGE RATE,
EXCHANGE RATE DEPRECIATION,
EXCHANGE RATE POLICIES,
EXCHANGE RATE POLICY,
EXCHANGE RATE REGIME,
EXCHANGE RATE REGIMES,
EXCHANGE RATE RISK,
EXCHANGE RATES,
FINANCIAL CONTRACTS,
FINANCIAL DEVELOPMENT,
FINANCIAL DOLLARIZATION,
FINANCIAL FRAGILITY,
FINANCIAL INSTITUTIONS,
FOREIGN CURRENCY,
FOREIGN CURRENCY DEBT,
FUNCTIONAL FORMS,
GOVERNMENT DEBT,
INCOME,
INFLATION,
INFORMATION ASYMMETRIES,
INSURANCE,
INTEREST RATE,
INTEREST RATES,
LIQUIDITY,
MACROECONOMIC IMPLICATIONS,
MACROECONOMIC SHOCKS,
MACROECONOMIC VARIABLES,
MARGINAL BENEFITS,
MARGINAL COST,
MARGINAL COSTS,
MARKET ECONOMIES,
MONETARY AUTHORITIES,
MONETARY AUTHORITY,
MORAL HAZARD,
NET WORTH,
OPTIMIZATION,
PERFECT COMPETITION,
PERFECT INFORMATION,
POLICY CREDIBILITY,
POLICY RESEARCH,
PORTFOLIO,
PORTFOLIOS,
PRIVATE AGENTS,
PRODUCTIVITY,
PURCHASING POWER,
RISK AVERSE,
SAVINGS,
TAXATION,
UTILITY FUNCTION,
ACCOUNTING,
INFORMATION, |
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| Online Access: | http://documents.worldbank.org/curated/en/2003/06/2438507/financial-dollarization-central-bank-credibility
http://hdl.handle.net/10986/18170
|
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