Finantial Dollarization and Debt Deflation under a Currency Board

Eduardo Levy Yeyati, Ernesto Schargrodsky and Sebastian Galiani

Business School Working Papers from Universidad Torcuato Di Tella

Abstract: In the late currency board years, Argentina faced a real exchange rate adjustment through price deflation amidst growing devaluation expectations. Using a firm-level panel database to analyze the incidence of these factors on the currency composition of private debt and on firms’ performance, we find that widespread debt dollarization showed no relationship with the firms’ production mix or the ever-changing probability of a nominal devaluation. While relative price changes favored export-oriented firms with the expected impact on sales, earnings and investment, increases in devaluation expectations elicited only a marginal differential response in investment from more financially dollarized firms. Our findings provide support to two criticisms faced by the Argentine currency board in recent years, namely, that by fueling beliefs in an implicit guarantee it stimulated across-the-board debt dollarization, and that it could not fully isolate the economy from real shocks, as the feared balance sheet effect was replaced by a gradual but equally deleterious debt deflation effect.

Pages: 33 pages
Date: 2003-09-12
New Economics Papers: this item is included in nep-fin, nep-ifn and nep-lam
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Citations: View citations in EconPapers (17)

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Related works:
Journal Article: Financial dollarization and debt deflation under a currency board (2003)
Working Paper: Financial Dollarization and Debt Deflation under a Currency Board (2003)
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