Financial Dollarization Equilibria: A Framework for Policy Analysis

Author/Editor:

Alain Ize

Publication Date:

September 1, 2005

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Rapidly rising dollarization and numerous related financial crises in recent years have heightened the need for policy action. This paper contributes to the policy debate by presenting a common analytic framework that examines the roots of de facto financial dollarization under different economic environments and analyzes its interplay with monetary and prudential policies. In addition to providing a systematic analysis of the existence, stability, and multiplicity of dollarization equilibria, the paper makes a few novel contributions. In particular, it stresses the key role played by monetary policy endogeneity and identifies the underlying determinants of the peso premium that are responsible for inducing a preference for the dollar in financial transactions.

Series:

Working Paper No. 2005/186

Subject:

Credit risk Currencies Dollarization Exchange rates Market risk

English

Publication Date:

September 1, 2005

ISBN/ISSN:

9781451862058/1018-5941

Stock No:

WPIEA2005186

Pages:

30

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