Dollarization and Financial Integration

Jonathan Heathcote () and Cristina Arellano

No 10, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: This paper builds a simple theoretical model designed to study dollarization. Each period, a benevolent government decides whether or not to dollarize, how much to borrow or lend on an international bond market, and, if dollarization has not occurred, the devaluation rate. In equilibrium, international borrowing is limited endogenously such that the government always chooses to repay when the penalty for default is permanent future exclusion from financial markets. Dollarization implies the loss of the devaluation rate as a policy instrument, but may still be optimal. The reason is that floating defaulters can use the devaluation rate as a substitute for debt in responding to country-specific shocks while dollarized economies in default find themselves in a more uncomfortable situation. Thus dollarization reduces a government's incentives to default, and thereby increases a country's ability to borrow in equilibrium

Keywords: Dollarization; International Debt; Default (search for similar items in EconPapers)
JEL-codes: E3 F3 (search for similar items in EconPapers)
Date: 2004

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: Dollarization and financial integration (2007)
Working Paper: Dollarization and financial integration (2007)
Working Paper: Dollarization and Financial Integration (2007)
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: http://EconPapers.repec.org/RePEc:red:sed004:10

Access Statistics for this paper

More papers in 2004 Meeting Papers from Society for Economic Dynamics
Address: Society for Economic Dynamics Anne Stubing CV Starr Center for Applied Economics 269 Mercer Street, Room 303 New York University New York, NY 10003
Contact information at EDIRC.
Series data maintained by Christian Zimmermann ().