Liability Dollarization and the Bank Balance Sheet Channel

Author/Editor:

David Cook ; Woon Gyu Choi

Publication Date:

August 1, 2002

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Banks in developing economies often face a mismatch in the currency denomination of their liabilities (foreign currency denominated debt) and assets (domestic currency loans to domestic borrowers). We study the effect of this mismatch on business cycles and monetary policy in a sticky-price, dynamic general equilibrium model of a small open economy. We find from the model analysis that a fixed exchange rate rule that stabilizes the balance sheets of banks offers greater stability than an interest rate rule that targets inflation in the sticky-price sector of the economy.

Series:

Working Paper No. 02/141

Subject:

English

Publication Date:

August 1, 2002

ISBN/ISSN:

9781451856194/1018-5941

Stock No:

WPIEA1412002

Format:

Paper

Pages:

26

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