Liability Dollarization and the Bank Balance Sheet Channel

August 1, 2002

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Format: Chicago

David Cook, and Woon Gyu Choi. Liability Dollarization and the Bank Balance Sheet Channel, (USA: International Monetary Fund, 2002) accessed September 19, 2024

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.

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

Publication Details

Pages:

26
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2002/141
Stock No:

WPIEA1412002
ISBN:

9781451856194
ISSN:

1018-5941

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