Banking and the political support for dollarization

Huberto M. Ennis ()

No 00-12, Working Paper from Federal Reserve Bank of Richmond

Abstract: In this paper we study dollarization as a commitment device that the Central Bank could use to avoid getting involved in an undesirable banking-sector bailout. We show how a political process could induce an equilibrium outcome that differs from the one that a benevolent Central Bank would want to implement. Dollarization then could be used to restore the economy to the benevolent outcome. In so doing though, political support for dollarization becomes essential. For our benchmark case, dollarization does not have enough support to be actually implemented. But when we study the interaction among dollarization, the introduction of international banks, and the political process, we find that bank internationalization may help to attain the necessary political support that can make dollarization a viable policy.

Keywords: Bank failures; Dollar; Currency convertibility (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-mon
Date: 2000
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