Click here for search results
Financial dollarization and central bank credibility, Volume 1
Author:Cowan, kevin; Quy-Toan Do; Date Stored:2003/07/26
Document Date:2003/06/30Document Type:Policy Research Working Paper
SubTopics:Environmental Economics & Policies; Payment Systems & Infrastructure; Economic Theory & Research; Economic Stabilization; Macroeconomic Management; Financial Intermediation; Fiscal & Monetary PolicyLanguage:English
Major Sector:FinanceReport Number:WPS3082
Sub Sectors:BankingCollection Title:Policy, Research working paper series ; no. WPS 3082
Volume No:1  

Summary: 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.

Official Documents
Official, scanned versions of documents (may include signatures, etc.)
File TypeDescriptionFile Size (mb)
PDF 40 pagesOfficial version*2.8 (approx.)
TextText version**
How To Order
Light-Weight Documents
Lighter (less MB) documents which may or may not be the final, official version
File TypeDescriptionFile Size (mb)
PDF 32 pagesWPS30820.53

* The official version is derived from scanning the final, paper copy of the document and is the official,
archived version including all signatures, charts, etc.
** The text version is the OCR text of the final scanned version and is not an accurate representation of the final text.
It is provided solely to benefit users with slow connectivity.

Permanent URL for this page: