Dollarization, Bailouts and the Stability of the Banking System

Douglas Gale () and Xavier Vives

No 2901, CEPR Discussion Papers from Centre for Economic Policy Research

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 preferable 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. A very severe moral hazard problem could make dollarization undesirable, however. 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: Moral hazard; Banking crisis; Lender of last resort; Liquidity; IMF (search for similar items in EconPapers)
JEL-codes: E58 F30 G28 (search for similar items in EconPapers)
Date: 2001-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://cepr.org/publications/DP2901 (application/pdf)

Related works:
Journal Article: 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 (2002)
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:cpr:ceprdp:2901

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP2901

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().