Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/189526
Authors: 
Machicado, Carlos Gustavo
Year of Publication: 
2006
Series/Report no.: 
Development Research Working Paper Series 09/2006
Abstract: 
This paper shows how uncertainty about liquidity demand can lead to a high degree of dollarization in the banking system. I study a model where the demand for currency in each period is random, and where it is easier for banks to borrow in local currency in times of crisis than in dollars. Banks choose a portfolio composed of local currency, dollars, and real loans. Compared to the anticipated transactions demand for each currency, I show that the bank will hold a relatively large amount of dollars and a relatively small amount of local currency. I also show the existence of a dollarization multiplier : as the anticipated transactions demand for dollars increases, the dollarization of the banking sector increases more than proportionately.
Subjects: 
Dollarization
Banking crisis
Banking System
JEL: 
F31
G21
G33
Document Type: 
Working Paper

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