Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/19347
Authors: 
Gale, Douglas
Vives, Xavier
Year of Publication: 
2002
Series/Report no.: 
HWWA Discussion Paper 185
Abstract: 
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.
Document Type: 
Working Paper

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