Financial Dollarization Equilibria: A Framework for Policy Analysis

Alain Ize

No 2005/186, IMF Working Papers from International Monetary Fund

Abstract: Rapidly rising dollarization and numerous related financial crises in recent years have heightened the need for policy action. This paper contributes to the policy debate by presenting a common analytic framework that examines the roots of de facto financial dollarization under different economic environments and analyzes its interplay with monetary and prudential policies. In addition to providing a systematic analysis of the existence, stability, and multiplicity of dollarization equilibria, the paper makes a few novel contributions. In particular, it stresses the key role played by monetary policy endogeneity and identifies the underlying determinants of the peso premium that are responsible for inducing a preference for the dollar in financial transactions.

Keywords: WP; monetary policy; exchange rate (search for similar items in EconPapers)
Pages: 30
Date: 2005-09-01
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Citations: View citations in EconPapers (16)

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