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Dollarization, Bailouts, And The Stability Of The Banking System

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Author Info
Douglas Gale
Xavier Vives

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Abstract

Central bank policy suffers from time inconsistency when facing a banking crisis: a bailout is optimal ex post, but ex ante it should be limited to control moral hazard. Dollarization provides a credible commitment not to help at the cost of not helping even when it would be ex ante optimal to do so. Dollarization is good when the costs of establishing a reputation for the central bank are high, monitoring effort by the banker is important in improving returns, and when the cost of liquidating projects is moderate. However, a very severe moral hazard problem could make dollarization undesirable. The results obtained are applied to assess the desirability of dollarization in a range of countries and the potential role of the IMF as International LOLR. We would never put ourselves in a position where we envisioned actions that we would take would be of assistance to the rest of the world but to the detriment of the United States. Alan Greenspan to a congressional panel in 1999 [IHT, January 19, 2000]. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 117 (2002)
Issue (Month): 2 (May)
Pages: 467-502
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Handle: RePEc:tpr:qjecon:v:117:y:2002:i:2:p:467-502

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Claudia Helene Dziobek & Ceyla Pazarbasioglu, 1997. "Lessons from Systemic Bank Restructuring: A Survey of 24 Countries," IMF Working Papers 97/161, International Monetary Fund.
  2. DEWATRIPONT, Mathias & TIROLE, Jean, 1992. "Efficient Governance Structure : Implications for Banking Regulation," IDEI Working Papers 18, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Fry, Maxwell J, 1998. "Assessing Central Bank Independence in Developing Countries: Do Actions Speak Louder Than Words?," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 512-29, July.
  4. Roberto Chang & Andres Velasco, 1998. "Financial Fragility and the Exchange Rate Regime," NBER Working Papers 6469, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Chang, R. & Velasco, A., 1998. "Financial Fragility and the Exchange Rate Regime," Working Papers 98-05, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  6. Franklin Allen & Douglas Gale, 1976. "Optimal Financial Crises," Center for Financial Institutions Working Papers 97-01, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  7. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-92, June. [Downloadable!] (restricted)
  8. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall. [Downloadable!] (restricted)
  9. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, Oxford University Press, vol. 6(3), pages 353-98, September.
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  1. Rochet, Jean Charles & Vives, Xavier, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," CEPR Discussion Papers 3233, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Olivier Jeanne & Jonathan David Ostry & Jeromin Zettelmeyer, 2008. "A Theory of International Crisis Lending and IMF Conditionality," IMF Working Papers 08/236, International Monetary Fund. [Downloadable!]
  3. Alain Ize & Andrew Powell, 2003. "Prudential Responses to De Facto Dollarization," Business School Working Papers defactodollarization, Universidad Torcuato Di Tella. [Downloadable!]
    Other versions:
  4. Roberto Duncan, 2003. "Exploring the Implications of Official Dollarization on Macroeconomic Volatility," Working Papers Central Bank of Chile 200, Central Bank of Chile. [Downloadable!]
  5. Ernesto Dal Bó & Pedro Dal Bó & Rafael Di Tella, 2002. "'Plata o Plomo': Bribe and Punishment in a Theory of Political Influence," Working Papers 2002-28, Brown University, Department of Economics. [Downloadable!]
  6. Alberto Alesina & Alexander Wagner, 2003. "Choosing (and reneging on) exchange rate regimes," NBER Working Papers 9809, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Bems, Rudolfs & Jönsson, Kristian, 2002. "Financial Crisis in Emerging Markets and the Optimal Bailout Policy," Working Paper Series in Economics and Finance 520, Stockholm School of Economics, revised 31 Oct 2003. [Downloadable!]
  8. Ernesto Dal Bó & Pedro Dal Bó & Rafael Di Tella, 2003. "Plata o Plomo?: Bribes and Threats in a Theory of Political Influence," Levine's Bibliography 506439000000000151, UCLA Department of Economics. [Downloadable!]
  9. David R. Skeie, 2008. "Banking with nominal deposits and inside money," Staff Reports 242, Federal Reserve Bank of New York. [Downloadable!]
  10. Steffen Sebastian & Marcel Tyrell, 2006. "Open-end real estate funds: danger or diamond?," Working Paper Series: Finance and Accounting 168, Department of Finance, Goethe University Frankfurt am Main. [Downloadable!]
  11. Giancarlo Corsetti & Bernardo Guimaraes & Nouriel Roubini, 2003. "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance," NBER Working Papers 10125, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Alberto Alesina & Robert J. Barro & Silvana Tenreyro, 2002. "Optimal Currency Areas," NBER Working Papers 9072, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. Huberto M. Ennis, 2003. "Economic fundamentals and bank runs," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 55-71. [Downloadable!]
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