IDEAS home Printed from https://ideas.repec.org/a/taf/intecj/v20y2006i3p343-355.html
   My bibliography  Save this article

A model of liability dollarization and myopic governments

Author

Listed:
  • Adam Honig

Abstract

Liability dollarization of the domestic banking system represents a source of vulnerability for emerging market countries. The root cause is a lack of faith in the domestic currency, which ultimately stems from the belief that the government will not follow policies that promote long-run currency stability. This paper presents a model in which government myopia determines the unofficial dollarization of bank credit. Specifically, myopic politicians will choose low interest rates to expand short-run output in order to get re-elected, but this choice has the long-run consequence of increasing dollar lending. Increased liability dollarization is shown to force the hand of future decision-makers into choosing fixed exchange rates because of the fear that large depreciations will destroy balance sheets. The results imply that institutional reforms are necessary to reverse liability dollarization.

Suggested Citation

  • Adam Honig, 2006. "A model of liability dollarization and myopic governments," International Economic Journal, Taylor & Francis Journals, vol. 20(3), pages 343-355.
    • Handle: RePEc:taf:intecj:v:20:y:2006:i:3:p:343-355
    DOI: 10.1080/10168730600879414
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/10168730600879414
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/10168730600879414?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2000. "A simple model of monetary policy and currency crises," European Economic Review, Elsevier, vol. 44(4-6), pages 728-738, May.
    2. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 379-408.
    3. Guillermo A. Calvo & Frederic S. Mishkin, 2003. "The Mirage of Exchange Rate Regimes for Emerging Market Countries," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 99-118, Fall.
    4. Acemoglu, Daron & Johnson, Simon & Robinson, James & Thaicharoen, Yunyong, 2003. "Institutional causes, macroeconomic symptoms: volatility, crises and growth," Journal of Monetary Economics, Elsevier, vol. 50(1), pages 49-123, January.
    5. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    6. De Nicolo, Gianni & Honohan, Patrick & Ize, Alain, 2003. "Dollarization of the banking system : good or bad?," Policy Research Working Paper Series 3116, The World Bank.
    7. John D. Burger & Francis E. Warnock, 2003. "Diversification, original sin, and international bond portfolios," International Finance Discussion Papers 755, Board of Governors of the Federal Reserve System (U.S.).
    8. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
    9. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers.
    10. Mishkin, Frederic S. & Savastano, Miguel A., 2001. "Monetary policy strategies for Latin America," Journal of Development Economics, Elsevier, vol. 66(2), pages 415-444, December.
    11. Hoyt Bleakley & Kevin Cowan, 2008. "Corporate Dollar Debt and Depreciations: Much Ado About Nothing?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 612-626, November.
    12. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
    13. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Amira MAJOUL & Olfa MANAI DABOUSSI, 2016. "Nonlinear Effects of the Financial Crisis on Economic Growth in Asian Countries: Empirical Evaluation with a PSTR Model," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(8), pages 445-456, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Honig, Adam, 2009. "Dollarization, exchange rate regimes and government quality," Journal of International Money and Finance, Elsevier, vol. 28(2), pages 198-214, March.
    2. Guillermo A. Calvo & Frederic S. Mishkin, 2003. "The Mirage of Exchange Rate Regimes for Emerging Market Countries," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 99-118, Fall.
    3. Raghuram G. Rajan & Ioannis Tokatlidis, 2005. "Dollar Shortages and Crises," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
    4. Honig, Adam, 2005. "Fear of floating and domestic liability dollarization," Emerging Markets Review, Elsevier, vol. 6(3), pages 289-307, September.
    5. Marcelin, Isaac & Mathur, Ike, 2016. "Financial sector development and dollarization in emerging economies," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 20-32.
    6. Robert Chang & Andres Velasco, 2004. "Endogenous dollarization, expectations, and equilibrium monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    7. Roberto Chang & Andres Velasco, 2004. "Monetary Policy and the Currency Denomination of Debt: A Tale of Two Equilibria," CID Working Papers 106, Center for International Development at Harvard University.
    8. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, vol. 94(4), pages 1183-1193, September.
    9. Augusto De La Torre & Eduardo Levy Yeyati & Sergio L. Schmukler, 2002. "Financial Globalization: Unequal Blessings," International Finance, Wiley Blackwell, vol. 5(3), pages 335-357, November.
    10. Patrick Artus, 2003. "Local Currency or Foreign Currency Debt?," Revue économique, Presses de Sciences-Po, vol. 54(5), pages 1013-1031.
    11. Berg, Andrew & Borensztein, Eduardo & Mauro, Paolo, 2002. "An evaluation of monetary regime options for Latin America," The North American Journal of Economics and Finance, Elsevier, vol. 13(3), pages 213-235, December.
    12. Kenza Benhima, 2012. "Exchange Rate Volatility and Productivity Growth: The Role of Liability Dollarization," Open Economies Review, Springer, vol. 23(3), pages 501-529, July.
    13. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, number 9780199653126.
    14. Miguel FUENTES, 2009. "Dollarization Of Debt Contracts: Evidence From Chilean Firms," The Developing Economies, Institute of Developing Economies, vol. 47(4), pages 458-487, December.
    15. Livia Chitu, 2013. "Was Unofficial Dollarisation/Euroisation an Amplifier of the ‘Great Recession’ of 2007–2009 in Emerging Economies?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 55(2), pages 233-265, June.
    16. Augusto De La Torre & Sergio L. Schmukler, 2004. "Coping with Risks through Mismatches: Domestic and International Financial Contracts for Emerging Economies," International Finance, Wiley Blackwell, vol. 7(3), pages 349-390, December.
    17. Galindo, Arturo & Leiderman, Leonardo, 2005. "Living with Dollarization and the Route to Dedollarization," IDB Publications (Working Papers) 1553, Inter-American Development Bank.
    18. Jose Luiz Rossi Junior, 2004. "Foreign Exchange exposure, corporate financial policies and the exchange rate regime: Evidence from Brazil," Econometric Society 2004 Latin American Meetings 163, Econometric Society.
    19. Frankel, Jeffrey, 2010. "Monetary Policy in Emerging Markets," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 25, pages 1439-1520, Elsevier.
    20. Arturo Galindo & Leonardo Leiderman, 2005. "Vivir con la dolarización y el camino hacia la desdolarización," Research Department Publications 4398, Inter-American Development Bank, Research Department.

    More about this item

    Keywords

    Liability dollarization; government myopia;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:intecj:v:20:y:2006:i:3:p:343-355. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RIEJ20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.