Financial Dollarization and Central Bank Credibility
Why do firms and banks hold foreign currency denominated liabilities? The authors argue that foreign currency debt, by altering the effect of a devaluation on output, has a disciplining effect when the Central Bank's objectives differ from the...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2003/06/2438507/financial-dollarization-central-bank-credibility http://hdl.handle.net/10986/18170 |
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okr-10986-181702021-04-23T14:03:41Z Financial Dollarization and Central Bank Credibility Cowan, Kevin Do, Quy-Toan DOLLAR STANDARD CENTRAL BANKS FOREIGN CURRENCY DEPOSIT ACCOUNTS MONETARY POLICY INFORMATION ACCOUNTING ADVERSE EFFECTS AGGREGATE DEMAND ARBITRAGE AVERAGE INFLATION BALANCE SHEETS BORROWING CAPACITY BUILDING CAPITAL ACCOUNT CENTRAL BANK CENTRAL BANK CREDIBILITY CENTRAL BANKS COMPETITIVENESS DEBT DEPOSITS DEVALUATION DISTORTIONARY EFFECTS EMERGING ECONOMIES EMPIRICAL EVIDENCE EQUILIBRIUM EQUILIBRIUM ANALYSIS EXCHANGE RATE EXCHANGE RATE DEPRECIATION EXCHANGE RATE POLICIES EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATE RISK EXCHANGE RATES FINANCIAL CONTRACTS FINANCIAL DEVELOPMENT FINANCIAL DOLLARIZATION FINANCIAL FRAGILITY FINANCIAL INSTITUTIONS FOREIGN CURRENCY FOREIGN CURRENCY DEBT FUNCTIONAL FORMS GOVERNMENT DEBT INCOME INFLATION INFORMATION ASYMMETRIES INSURANCE INTEREST RATE INTEREST RATES LIQUIDITY MACROECONOMIC IMPLICATIONS MACROECONOMIC SHOCKS MACROECONOMIC VARIABLES MARGINAL BENEFITS MARGINAL COST MARGINAL COSTS MARKET ECONOMIES MONETARY AUTHORITIES MONETARY AUTHORITY MONETARY POLICY MORAL HAZARD NET WORTH OPTIMIZATION PERFECT COMPETITION PERFECT INFORMATION POLICY CREDIBILITY POLICY RESEARCH PORTFOLIO PORTFOLIOS PRIVATE AGENTS PRODUCTIVITY PURCHASING POWER RISK AVERSE SAVINGS TAXATION UTILITY FUNCTION ACCOUNTING INFORMATION Why do firms and banks hold foreign currency denominated liabilities? The authors argue that foreign currency debt, by altering the effect of a devaluation on output, has a disciplining effect when the Central Bank's objectives differ from the social optimum. However, under imperfect information, bad priors about the Central Bank induce excess dollarization of liabilities, which in turn limits the ability of the Central Bank to conduct an optimal monetary policy. In addition the economy may become stuck in a "dollarization trap" in which dollarized liabilities limit the ability of agents to learn the true type of the monetary authority. The model has clear-cut policy implications regarding the taxation of foreign currency liabilities as a way to encourage perfect information and avoid dollarization traps. Moreover, it reinforces the existing argument for Central Bank independence. Finally, the authors believe this model to be consistent with a growing empirical literature on the determinants of foreign currency liabilities and their relationships to Central Bank credibility. 2014-05-05T20:07:44Z 2014-05-05T20:07:44Z 2003-06 http://documents.worldbank.org/curated/en/2003/06/2438507/financial-dollarization-central-bank-credibility http://hdl.handle.net/10986/18170 English en_US Policy Research Working Paper;No. 3082 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
DOLLAR STANDARD CENTRAL BANKS FOREIGN CURRENCY DEPOSIT ACCOUNTS MONETARY POLICY INFORMATION ACCOUNTING ADVERSE EFFECTS AGGREGATE DEMAND ARBITRAGE AVERAGE INFLATION BALANCE SHEETS BORROWING CAPACITY BUILDING CAPITAL ACCOUNT CENTRAL BANK CENTRAL BANK CREDIBILITY CENTRAL BANKS COMPETITIVENESS DEBT DEPOSITS DEVALUATION DISTORTIONARY EFFECTS EMERGING ECONOMIES EMPIRICAL EVIDENCE EQUILIBRIUM EQUILIBRIUM ANALYSIS EXCHANGE RATE EXCHANGE RATE DEPRECIATION EXCHANGE RATE POLICIES EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATE RISK EXCHANGE RATES FINANCIAL CONTRACTS FINANCIAL DEVELOPMENT FINANCIAL DOLLARIZATION FINANCIAL FRAGILITY FINANCIAL INSTITUTIONS FOREIGN CURRENCY FOREIGN CURRENCY DEBT FUNCTIONAL FORMS GOVERNMENT DEBT INCOME INFLATION INFORMATION ASYMMETRIES INSURANCE INTEREST RATE INTEREST RATES LIQUIDITY MACROECONOMIC IMPLICATIONS MACROECONOMIC SHOCKS MACROECONOMIC VARIABLES MARGINAL BENEFITS MARGINAL COST MARGINAL COSTS MARKET ECONOMIES MONETARY AUTHORITIES MONETARY AUTHORITY MONETARY POLICY MORAL HAZARD NET WORTH OPTIMIZATION PERFECT COMPETITION PERFECT INFORMATION POLICY CREDIBILITY POLICY RESEARCH PORTFOLIO PORTFOLIOS PRIVATE AGENTS PRODUCTIVITY PURCHASING POWER RISK AVERSE SAVINGS TAXATION UTILITY FUNCTION ACCOUNTING INFORMATION |
| spellingShingle |
DOLLAR STANDARD CENTRAL BANKS FOREIGN CURRENCY DEPOSIT ACCOUNTS MONETARY POLICY INFORMATION ACCOUNTING ADVERSE EFFECTS AGGREGATE DEMAND ARBITRAGE AVERAGE INFLATION BALANCE SHEETS BORROWING CAPACITY BUILDING CAPITAL ACCOUNT CENTRAL BANK CENTRAL BANK CREDIBILITY CENTRAL BANKS COMPETITIVENESS DEBT DEPOSITS DEVALUATION DISTORTIONARY EFFECTS EMERGING ECONOMIES EMPIRICAL EVIDENCE EQUILIBRIUM EQUILIBRIUM ANALYSIS EXCHANGE RATE EXCHANGE RATE DEPRECIATION EXCHANGE RATE POLICIES EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATE RISK EXCHANGE RATES FINANCIAL CONTRACTS FINANCIAL DEVELOPMENT FINANCIAL DOLLARIZATION FINANCIAL FRAGILITY FINANCIAL INSTITUTIONS FOREIGN CURRENCY FOREIGN CURRENCY DEBT FUNCTIONAL FORMS GOVERNMENT DEBT INCOME INFLATION INFORMATION ASYMMETRIES INSURANCE INTEREST RATE INTEREST RATES LIQUIDITY MACROECONOMIC IMPLICATIONS MACROECONOMIC SHOCKS MACROECONOMIC VARIABLES MARGINAL BENEFITS MARGINAL COST MARGINAL COSTS MARKET ECONOMIES MONETARY AUTHORITIES MONETARY AUTHORITY MONETARY POLICY MORAL HAZARD NET WORTH OPTIMIZATION PERFECT COMPETITION PERFECT INFORMATION POLICY CREDIBILITY POLICY RESEARCH PORTFOLIO PORTFOLIOS PRIVATE AGENTS PRODUCTIVITY PURCHASING POWER RISK AVERSE SAVINGS TAXATION UTILITY FUNCTION ACCOUNTING INFORMATION Cowan, Kevin Do, Quy-Toan Financial Dollarization and Central Bank Credibility |
| relation |
Policy Research Working Paper;No. 3082 |
| description |
Why do firms and banks hold foreign
currency denominated liabilities? The authors argue that
foreign currency debt, by altering the effect of a
devaluation on output, has a disciplining effect when the
Central Bank's objectives differ from the social
optimum. However, under imperfect information, bad priors
about the Central Bank induce excess dollarization of
liabilities, which in turn limits the ability of the Central
Bank to conduct an optimal monetary policy. In addition the
economy may become stuck in a "dollarization trap"
in which dollarized liabilities limit the ability of agents
to learn the true type of the monetary authority. The model
has clear-cut policy implications regarding the taxation of
foreign currency liabilities as a way to encourage perfect
information and avoid dollarization traps. Moreover, it
reinforces the existing argument for Central Bank
independence. Finally, the authors believe this model to be
consistent with a growing empirical literature on the
determinants of foreign currency liabilities and their
relationships to Central Bank credibility. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Cowan, Kevin Do, Quy-Toan |
| author_facet |
Cowan, Kevin Do, Quy-Toan |
| author_sort |
Cowan, Kevin |
| title |
Financial Dollarization and Central Bank Credibility |
| title_short |
Financial Dollarization and Central Bank Credibility |
| title_full |
Financial Dollarization and Central Bank Credibility |
| title_fullStr |
Financial Dollarization and Central Bank Credibility |
| title_full_unstemmed |
Financial Dollarization and Central Bank Credibility |
| title_sort |
financial dollarization and central bank credibility |
| publisher |
World Bank, Washington, DC |
| publishDate |
2014 |
| url |
http://documents.worldbank.org/curated/en/2003/06/2438507/financial-dollarization-central-bank-credibility http://hdl.handle.net/10986/18170 |
| _version_ |
1764439043858235392 |