Liability dollarization and fear of floating

Quoc Hung Nguyen

No 247, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: This paper explores the idea that fear of floating can be justified as an optimal discretionary monetary policy in a dollarized emerging economy. Specifically, I consider a small open economy in which intermediate goods importers borrow in foreign currency and face a credit constraint. In this economy, exchange rate depreciation not only worsens importers' net-worth but also increases the financing amount in domestic currency, therefore exaggerating their borrowing finance premium. Besides, because of high exchange rate pass-through into import prices, fluctuations in the exchange rate also have strong impacts on domestic prices and production. These effects, together, magnify the macroeconomic consequences of the floating exchange rate policy in response to external shocks. The paper shows that the floating exchange rate regime is dominated by the fixed exchange rate regime in the role of cushioning shocks and in welfare terms.

Keywords: Developing countries; Foreign exchange; Exchange control; Liability Dollarization; Fear of Floating; Imported Goods (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2010-08
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in IDE Discussion Paper = IDE Discussion Paper, No. 247. 2010-08

Downloads: (external link)
https://ir.ide.go.jp/record/37924/files/IDP000247_001.pdf First version, 2010 (application/pdf)

Related works:
Working Paper: Liability Dollarization and Fear of Floating (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:jet:dpaper:dpaper247

Ordering information: This working paper can be ordered from
Publication Office, IDE 3-2-2 Wakaba, Mihama-ku, Chiba-shi, Chiba 261-8545 JAPAN
http://www.ide.go.jp/English/Publish/Order

Access Statistics for this paper

More papers in IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO) Contact information at EDIRC.
Bibliographic data for series maintained by Michitaka Imamitsu ().