Dollarization, Bailouts, and the Stability of the Banking System

Douglas Gale () and Xavier Vives ()

No 26195, Discussion Paper Series from Hamburg Institute of International Economics

Abstract: Central bank policy suffers from time-inconsistency when facing a banking crisis: A bailout is optimal ex post but ex ante it should be limited to control moral hazard. Dollarization provides a credible commitment not to help at the cost of not helping even when it would be ex ante optimal to do so. Dollarization is good when the costs of establishing a reputation for the central bank are high, monitoring effort by the banker is important in improving returns, and when the cost of liquidating projects is moderate. However, a very severe moral hazard problem could make dollarization Undesirable. The results obtained are applied to assess the desirability of dollarization in a range of countries and the potential role of the IMF as International LOLR.

Keywords: Financial Economics (search for similar items in EconPapers)
Date: 2002
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Related works:
Working Paper: Dollarization, Bailouts and the Stability of the Banking System (2001)
Journal Article: Dollarization, bailouts, and the stability of the banking system (2001)
Journal Article: Dollarization, Bailouts, And The Stability Of The Banking System (2002)
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Persistent link: http://EconPapers.repec.org/RePEc:ags:hiiedp:26195

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