Liability Dollarization and the Bank Balance Sheet Channel
August 1, 2002
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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.
Subject: Banking, Consumption, Exchange rates, Financial statements, Foreign exchange, National accounts, Prices, Public financial management (PFM), Return on investment, Sticky prices
Keywords: Asia and Pacific, bank balance sheet channel, capitalization ratio, Consumption, core rule, depreciation, East Asia, exchange rate, exchange rate depreciation, Exchange rates, Financial statements, foreign currency debt, Global, interest rate, interest rate rule, interest rate shock, nominal interest rate, PEG rule, Return on investment, risk premium, sticky prices, WP
Pages:
26
Volume:
2002
DOI:
Issue:
141
Series:
Working Paper No. 2002/141
Stock No:
WPIEA1412002
ISBN:
9781451856194
ISSN:
1018-5941
