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Liability Dollarization and Fear of Floating

Author

Listed:
  • Quoc Hung Nguyen

    (University of British Columbia)

Abstract
This paper addresses the question of whether fear of floating in developing countries can be justified as optimal discretionary monetary policy in a dollarized economy where intermediate goods importers face Bernanke-type credit constraint. Exchange rate depreciation not only worsens the net-worth but also increases the financing amount of importer firms who borrow in foreign currency, hence exaggerating the borrowing finance premium. Besides, because of high exchange rate passthrough, fluctuations in the exchange rate also have strong impacts on domestic price levels and production. These effects, together, magnify the macroeconomic consequences of the economy that experiences external and domestic technology shocks. It can be shown that the fixed exchange rate regime dominates the inflation targeting regime in both the role of cushioning shocks and in welfare terms.

Suggested Citation

  • Quoc Hung Nguyen, 2007. "Liability Dollarization and Fear of Floating," Working Papers 16, Development and Policies Research Center (DEPOCEN), Vietnam, revised May 2008.
  • Handle: RePEc:dpc:wpaper:1607
    as

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    File URL: http://depocenwp.org/modules/download/index.php?id=16
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    References listed on IDEAS

    as
    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    2. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 379-408.
    3. Michael B. Devereux & Philip R. Lane & Juanyi Xu, 2006. "Exchange Rates and Monetary Policy in Emerging Market Economies," Economic Journal, Royal Economic Society, vol. 116(511), pages 478-506, April.
    4. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1997. "Sticky price and limited participation models of money: A comparison," European Economic Review, Elsevier, vol. 41(6), pages 1201-1249, June.
    5. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
    6. Braggion, Fabio & Christiano, Lawrence J. & Roldos, Jorge, 2009. "Optimal monetary policy in a [`]sudden stop'," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 582-595, May.
    7. repec:cuf:journl:y:2015:v:16:i:1:reinhart:rogoff:savastano is not listed on IDEAS
    8. Devereux, Michael B & Poon, Doris, 2004. "A Simple Model of Optimal Monetary Policy with Financial Constraints," CEPR Discussion Papers 4370, C.E.P.R. Discussion Papers.
    9. Julio J. Rotemberg, 1982. "Monopolistic Price Adjustment and Aggregate Output," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(4), pages 517-531.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Rizvi, S.K.A. & Naqvi, Bushra & Mirza, Nawazish & Bordes, Christian, 2017. "Fear of floating in Asia and the credibility of true floaters?," Research in International Business and Finance, Elsevier, vol. 42(C), pages 149-160.

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    More about this item

    Keywords

    Liability Dollarizaion; Fear of Floating; Imported Goods;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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