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A simple theoretical framework for the analysis of liability dollarization

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  • Daniel Heymann - Enrique Kawamura

Abstract

This paper presents a simple model of debt contracts in order to analyze the conditions under which domestic residents would choose to denominate debts in ``dollars''. In the model, borrowers are producers of non-traded goods, and subject to shocks on prices. The real exchange rate varies in response to real shocks. There is a domestic unit of account; prices in terms of that unit can be shocked by a (presumably policy - induced) disturbance. Debt obligations can be denominated in either traded goods (dollarized contracts) or local currency. When real and nominal shocks are possitively correlated, dollarized contracts tend to be preferable to (non-contingent) nominal contracts when nominal shocks are large and real shocks are small

Suggested Citation

  • Daniel Heymann - Enrique Kawamura, 2004. "A simple theoretical framework for the analysis of liability dollarization," Econometric Society 2004 Latin American Meetings 120, Econometric Society.
  • Handle: RePEc:ecm:latm04:120
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    References listed on IDEAS

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    More about this item

    Keywords

    Liability Dollarization; Nominal and Real Shocks.;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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