Persistence of dollarization after price stabilization
Rappoport, Veronica
(2009)
Persistence of dollarization after price stabilization
Journal of Monetary Economics, 56 (7).
pp. 979-989.
ISSN 0304-3932
Credit contracts in developing countries are often denominated in foreign currencies, even after many of these economies succeeded in controlling inflation. This paper proposes a new interpretation of this apparent puzzle based on the demand for insurance against real shocks: the fact that devaluations occur more frequently in adverse states of the world provides a motive for holding dollar assets. This approach implies a complementarity between the optimal monetary policy and the currency denomination of contracts. When a large proportion of liabilities is denominated in a foreign currency, the optimal exchange rate volatility is low, which reinforces the demand for dollar assets.
| Item Type | Article |
|---|---|
| Copyright holders | © 2009 Elsevier B.V. |
| Keywords | dollarization, nonexlusive contracts, multiple equilibria, underinsurance |
| Departments | Management |
| DOI | 10.1016/j.jmoneco.2009.09.002 |
| Date Deposited | 12 Nov 2013 09:52 |
| URI | https://researchonline.lse.ac.uk/id/eprint/50047 |
Explore Further
- http://www.sciencedirect.com/science/journal/03043... (Official URL)
ORCID: https://orcid.org/0009-0007-3665-4304