Assessing Financial Vulnerability in Partially Dollarized Economies

Eduardo Moron, Juan Castro and Diego Winkelried
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Diego Winkelried: Banco Central de Reserva del Peru

International Finance from University Library of Munich, Germany

Abstract: The reduction of macroeconomic vulnerability in emerging markets is at the core of the research agenda. In this context, liability dollarization plays a vital role and its implications have been addressed in the literature via a “financial accelerator” mechanism. After allowing for different degrees of liability dollarization in a general equilibrium framework, this analysis uncovers some important implications about the role of the asset price channel and central bank’s commitment with the exchange rate, when assessing financial vulnerability. If we asses vulnerability in terms of the evolution of investment, we claim that, in absence of an asset price channel, departures from a pure float will not only help mitigate vulnerability but will also be welfare improving. On the other hand, and with an active asset price channel, a tighter exchange rate policy will only have marginal effects on welfare and vulnerability when compared to that associated to a reduction in liability dollarization.

Keywords: Liability dollarization; financial vulnerability; fear of floating; monetary policy (search for similar items in EconPapers)
JEL-codes: E52 F41 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2004-06-01
New Economics Papers: this item is included in nep-ifn
Note: Type of Document - pdf; pages: 30
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Citations: View citations in EconPapers (7)

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Working Paper: Assessing Financial Vulnerability in Partial Dollarized Economies (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpif:0406002

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