Liability Dollarization and the Bank Balance Sheet Channel
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Summary:
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.
Series:
Working Paper No. 2002/141
Subject:
Banking Consumption Exchange rates Financial statements Foreign exchange National accounts Prices Public financial management (PFM) Return on investment Sticky prices
English
Publication Date:
August 1, 2002
ISBN/ISSN:
9781451856194/1018-5941
Stock No:
WPIEA1412002
Pages:
26
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