Dollarization of Liabilities in Non-tradable Goods Sector

Frederic Chabellard

No 380, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: This paper questions the motivation of dollar indebtedness by firms of the non-tradable good sectors in a period of exchange rate pressure. Given the structure of banks' indebtedness and protection of banks' foreign lenders, a dollar denominated loan may allow firms to insure (partially) against the risk of an early liquidation of their projects if they turn out to be poor. Then it is shown that under dollarization of liabilities the government may be urged to soften monetary policy to induce a real appreciation that supports the domestic banking system. Therefore, it might be constrained in its ability to enforce an efficient regulatory policy.

Keywords: Foreign currency debt; real and nominal exchange rates; soft budget constraints; too many to fail; regulatory forbearance (search for similar items in EconPapers)
JEL-codes: G28 G33 (search for similar items in EconPapers)
Pages: pages
Date: 2001-06-01
New Economics Papers: this item is included in nep-ifn
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