Liability Dollarization and the Bank Balance Sheet Channel

David Cook and Woon Gyu Choi

No 2002/141, IMF Working Papers from International Monetary Fund

Abstract: Banks in developing economies often face a mismatch in the currency denomination of their liabilities (foreign currency denominated debt) and assets (domestic currency loans to domestic borrowers). We study the effect of this mismatch on business cycles and monetary policy in a sticky-price, dynamic general equilibrium model of a small open economy. We find from the model analysis that a fixed exchange rate rule that stabilizes the balance sheets of banks offers greater stability than an interest rate rule that targets inflation in the sticky-price sector of the economy.

Keywords: WP; interest rate; risk premium; exchange rate; bank balance sheet channel; foreign currency debt; sticky prices; depreciation; PEG rule; core rule; exchange rate depreciation; capitalization ratio; interest rate rule; nominal interest rate; interest rate shock; Return on investment; Exchange rates; Consumption; Financial statements; Asia and Pacific; East Asia; Global (search for similar items in EconPapers)
Pages: 26
Date: 2002-08-01
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Citations: View citations in EconPapers (18)

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Journal Article: Liability dollarization and the bank balance sheet channel (2004)
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