Dollarization, Bailouts, and the Stability of the Banking System

Douglas Gale () and Xavier Vives

The Quarterly Journal of Economics, 2002, vol. 117, issue 2, 467-502

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. We would never put ourselves in a position where we envisioned actions that we would take would be of assistance to the rest of the world but to the detriment of the United States. Alan Greenspan to a congressional panel in 1999 [IHT, January 19, 2000].

Date: 2002
References: Add references at CitEc
Citations: View citations in EconPapers (48)

Downloads: (external link)
http://hdl.handle.net/10.1162/003355302753650300 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Dollarization, Bailouts, and the Stability of the Banking System (2002)
Working Paper: Dollarization, bailouts, and the stability of the banking system (2002)
Working Paper: Dollarization, Bailouts and the Stability of the Banking System (2001)
Working Paper: Dollarization, bailouts, and the stability of the banking system (2001)
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:oup:qjecon:v:117:y:2002:i:2:p:467-502.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Quarterly Journal of Economics is currently edited by Robert J. Barro, Lawrence F. Katz, Nathan Nunn, Andrei Shleifer and Stefanie Stantcheva

More articles in The Quarterly Journal of Economics from President and Fellows of Harvard College
Bibliographic data for series maintained by Oxford University Press ().