Corporates in developing countries often issue foreign currency denominated debt. Liability dollarization carries additional risks since large devaluation of the real exchange rate can suddenly raise default probabilities. We use a small open economy Dynamic Stochastic General Equilibrium model with the “balance sheet channel” similar to Bernanke et al (1999) explicitly modeled to study the implications of liability dollarization for the conduct of monetary policy. Bayesian estimation methods are employed and the model is estimated for the Economic Community of the West African States (ECOWAS). We find that a floating regime offers greater stability than a hard peg. Results are robust to different model parameters, except for the degree of openness, highlighting the role of demand-switching effects.