Managing Systemic Liquidity Risk in Financially Dollarized Economies

Author/Editor:

Eduardo Levy Yeyati ; Alain Ize ; Miguel A. Kiguel

Publication Date:

September 1, 2005

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:

This paper evaluates ways to protect highly dollarized banking systems from systemic liquidity runs (such as the ones that took place recently in Argentina, Uruguay, and Paraguay). In view of the limitations of available (private or official) insurance schemes, and the distortions introduced by central bank lending of last resort (LOLR), the authors favor decentralized liquid foreign asset requirements on dollar deposits, supplemented by a scheme of "circuit breakers." The latter combines the use of limited dollar liquidity to ensure the convertibility of transactional deposits with a mechanism that automatically limits the convertibility of dollar term deposits once triggered by a predetermined decline in banks' liquidity.

Series:

Working Paper No. 05/188

Subject:

English

Publication Date:

September 1, 2005

ISBN/ISSN:

9781451862072/1018-5941

Stock No:

WPIEA2005188

Format:

Paper

Pages:

31

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