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Liability dollarization and the bank balance sheet channel

Authors Choi, Woon Gyu
Cook, David E. View this author's profile
Issue Date 2004
Source Journal of international economics , v. 64, (2), 2004, DEC, p. 247-275
Summary Emerging markets' financial institutions often face a mismatch in the currency denominations of their liabilities (foreign currency-denominated debt raised from foreign lenders) and their assets (domestic currency loans to domestic borrowers). We study the effect of this mismatch on monetary policy in a sticky-price, dynamic general-equilibrium small open economy model in which the country default-risk premium depends on domestic banks' balance sheets due to asymmetric information. A fixed exchange rate rule that stabilizes bank balance sheets offers greater stability than does an interest rate rule that targets inflation to offset the real effects of sticky-prices. (C) 2003 Elsevier B.V. All rights reserved.
ISSN 0022-1996
Language English
Format Article
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