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Persistence of dollarization after price stabilization

Rappoport, Veronica (2009) Persistence of dollarization after price stabilization. Journal of Monetary Economics, 56 (7). pp. 979-989. ISSN 0304-3932

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Abstract

Credit contracts in developing countries are often denominated in foreign currencies, even after many of these economies succeeded in controlling inflation. This paper proposes a new interpretation of this apparent puzzle based on the demand for insurance against real shocks: the fact that devaluations occur more frequently in adverse states of the world provides a motive for holding dollar assets. This approach implies a complementarity between the optimal monetary policy and the currency denomination of contracts. When a large proportion of liabilities is denominated in a foreign currency, the optimal exchange rate volatility is low, which reinforces the demand for dollar assets.

Item Type: Article
Official URL: http://www.sciencedirect.com/science/journal/03043...
Additional Information: © 2009 Elsevier B.V.
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > Management
Research centres and groups > Managerial Economics and Strategy Group
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 12 Nov 2013 09:52
URL: http://eprints.lse.ac.uk/50047/

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