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Financial Frictions and the Interest-Rate Differential in a Dollarized Economy

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  • Vega, Hugo

    (Banco Central de Reserva del Perú
    London School of Economics)

Abstract

This paper presents a partial equilibrium characterization of the credit market in an economy with partial financial dollarization. Financial frictions, in the form of costly state verification and banking regulation restrictions, are introduced and their impact on lending and deposit interest rates denominated in domestic and foreign currency studied. The analysis shows that reserve requirements act as a tax that leads banks to decrease deposit rates, while the wedge between foreign and domestic currency lending rates is decreasing in exchange rate volatility and increasing in the degree of correlation between entrepreneur's returns and the exchange rate.

Suggested Citation

  • Vega, Hugo, 2012. "Financial Frictions and the Interest-Rate Differential in a Dollarized Economy," Working Papers 2012-002, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2012-002
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    References listed on IDEAS

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    Cited by:

    1. Vega, Hugo, 2012. "Fricciones financieras y el diferencial de tasas de interés en una economía dolarizada," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 24, pages 9-26.

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