Dollarization, Bailouts, and the Stability of the Banking System

Central bank policy suffers from time-inconsistency when facing a banking crisis: A bailout is optimal ex post but ex ante it should be limited to control moral hazard. Dollarization provides a credible commitment not to help at the cost of not helping even when it would be ex ante optimal to do so. Dollarization is good when the costs of establishing a reputation for the central bank are high, monitoring effort by the banker is important in improving returns, and when the cost of liquidating projects is moderate. However, a very severe moral hazard problem could make dollarization Undesirable. The results obtained are applied to assess the desirability of dollarization in a range of countries and the potential role of the IMF as International LOLR.


Issue Date:
2002
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/26195
Total Pages:
56
Series Statement:
HWWA Discussion Paper 185




 Record created 2017-04-01, last modified 2017-08-24

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