Rajan, Raghuram G. and Tokatlidis, Ioannis (2005): Dollar Shortages and Crises. Published in: International Journal of Central Banking , Vol. Volume, No. Number 2 (1. September 2005): pp. 177-220.
Download (673Kb) | Preview
Emerging markets do not handle adverse shocks well. In this paper, we lay out an argument about why emerging markets are so fragile, and why they may adopt contractual mechanisms—such as a dollarized banking system—that increase their fragility. We draw on this analysis to explain why dollarized economies may be prone to dollar shortages and twin crises. The model of crises described here differs in some important aspects from what are now termed the first-, second-, and third-generation models of crises. We then examine how domestic policies, especially monetary policy, can mitigate the adverse effects of these crises. Finally, we consider the role, potentially constructive, that international financial institutions may undertake both in helping to prevent the crises and in helping to resolve them.
|Item Type:||MPRA Paper|
|Original Title:||Dollar Shortages and Crises|
|Subjects:||G - Financial Economics > G0 - General > G00 - General
G - Financial Economics > G0 - General
|Depositing User:||Terry Woodard|
|Date Deposited:||21. Nov 2006|
|Last Modified:||17. Feb 2013 20:30|
Acemoglu, Daron, Simon Johnson, and James Robinson. 2002. “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution.” Quarterly Journal of Economics 117 (4): 1231–94.
Acemoglu, Daron, Simon Johnson, James Robinson, and Yunyong Thaicharoen. 2003. “Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth.” Journal of Monetary Economics 50:49–123.
Aghion, Philippe, Philippe Bachetta, and Abhijit Banerjee. 2001. “Currency Crises and Monetary Policy in an Economy with Credit Constraints.” European Economic Review 45:1121–50.
Bali˜no, Tom´as, Adam Bennet, and Eduardo Borensztein. 1999. “Monetary Policy in Dollarized Economies.” IMF Occasional Paper 171.
Bleakley, Hoyt, and Kevin Cowan. 2002. “Corporate Dollar Debt and Devaluations: Much Ado about Nothing?”Federal Reserve Bank of Boston Working Paper No. 02-5.
Burnside, Craig, Martin Eichenbaum, and Sergio Rebelo. 2001a. “Prospective Deficits and the Asian Currency Crisis.” Journal of Political Economy 109 (6): 1155–97. 2001b. “Hedging and Financial Fragility in Fixed Exchange Rate Regimes.” European Economic Review 45 (7): 1151–93.
Caballero, Ricardo, and Arvind Krishnamurthy. 2000. “International Liquidity Management: Sterilization Policy in Illiquid Financial Markets.” NBER Working Paper 7740. 2003. “Excessive Dollar Debt: Financial Development and Underinsurance.” Journal of Finance 58 (2): 867–94. 2004. “Exchange Rate Volatility and the Credit Channel in Emerging Markets: A Vertical Perspective.” NBER Working Paper 10517.
Calomiris, Charles W., and Charles M. Kahn. 1991. “The Role of Demandable Debt in Structuring Optimal Banking Arrangements.” The American Economic Review 81 (3): 497–513.
Calvo, Guillermo, Alejandro Izquierdo, and Luis-Fernando Mej´ıa.2004. “On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects.” NBER Working Paper No. 10520.
Calvo, Guillermo, and Frederic Mishkin. 2003. “The Mirage of Exchange Rate Regimes for Emerging Market Economies.” Journal of Economic Perspectives 17 (4): 99–118.
Calvo, Guillermo, and Carmen Reinhart. 2002. “Fear of Floating.” Quarterly Journal of Economics 117 (2): 379–408.
Collier, Paul, V. L. Elliott, Havard Hegre, Anke Hoeffler, Marta Reynal-Querol, and Nicholas Sambanis. 2003. Breaking the Conflict Trap: Civil War and Development Policy.World Bank Policy Research Report. Oxford University Press.
Diamond, Douglas W., and Raghuram Rajan. 2001. “Liquidity risk,liquidity creation and financial fragility: A theory of banking.” Journal of Political Economy 109 (2): 287–327. 2005. “Liquidity Shortages and Banking Crises.” Journal of Finance LX (2): 615–47.
Edwards, Sebastian. 2004. “Thirty Years of Current Account Imbalances, Current Account Reversals, and Sudden Stops.” IMF Staff Papers 51 (Special Issue): 1–49.
Eichengreen, Barry, and Ricardo Hausmann. 2005. “Original Sin: The Road to Redemption.” In Other People’s Money: Debt Denomination and Financial Instability in Emerging Market Economies, ed. Barry Eichengreen and Ricardo Hausmann. Chicago: University of Chicago Press.
Eichengreen, Barry, Ricardo Hausmann, and Ugo Panizza. 2005a. “The Pain of Original Sin.” In Other People’s Money: Debt Denomination and Financial Instability in Emerging Market Economies, ed. Barry Eichengreen and Ricardo Hausmann. Chicago: University of Chicago Press. 2005b. “The Mystery of Original Sin.” In Other People’s Money: Debt Denomination and Financial Instability in Emerging Market Economies, ed. Barry Eichengreen and Ricardo Hausmann. Chicago: University of Chicago Press.
Frankel, Jeffrey, and Shang-Jin Wei. 2004. “Managing Macroeconomic Crises: Policy Lessons.” NBER Working Paper 10907,forthcoming in Managing Economic Volatility and Crises: A Practitioner’s Guide, ed. J. Aizenmann and B. Pinto. Cambridge University Press.
Ghosh, Atish R., Timothy Lane, Marianne Schulze-Ghattas, Ales Bul´ır, Javier Hamann, and Alex Mourmouras. 2002. “IMFSupported Programs in Capital Account Crises.” IMF Occasional Paper 210.
Glaeser, Edward, and Andrei Shleifer. 2001. “A Case for Quantity Regulation.” NBER Working Paper No. 8184.
Goldstein, Morris, and Philip Turner. 2004. Controlling Currency Mismatches in Emerging Economies. Washington, DC: Institute for International Economics. Inter-American Development Bank. 2005. Unlocking Credit: The Quest for Deep and Stable Bank Lending. Report on Economic and Social Progress in Latin America. Washington, DC: Inter-American Development Bank and The Johns Hopkins University Press.
Ize, Alain, and Eduardo Levy-Yeyati. 2003. “Financial Dollarization.” Journal of International Economics 59 (2): 323–47.
Jeanne, Olivier. 2005. “Why Do Emerging Economies Borrow in Foreign Currency?” In Other People’s Money, ed. Barry Eichengreen and Ricardo Hausmann. Chicago: University of Chicago Press.
Jeanne, Olivier, and Jeromin Zettelmeyer. 2004. “The Mussa Theorem (and Other Results on IMF-Induced Moral Hazard).” IMF Working Paper 04/192, forthcoming in IMF Staff Papers. International Monetary Fund.
Kaminsky, Graciela, Carmen Reinhart, and Carlos Vegh. 2005. “When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies.” In NBER Macroeconomics Annual 2004, ed. Mark Gertler and Kenneth Rogoff, 11–53. Cambridge, MA: The MIT Press.
Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi. 2004. “Governance Matters III: Governance Indicators for 1996–2002.” World Bank Economic Review 18 (2): 253–87.
Knack, Stephen, and Philip Keefer. 1995. “Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures.” Economics and Politics 7 (3): 207–27.
Lane, Philip, and Aaron Tornell. 1998. “Why Aren’t Savings Rates in Latin America Procyclical?” Journal of Development Economics 57 (1): 185–200.
Lindgren, Carl-Johan, Tom´as J.T. Bali˜no, Charles Enoch, Anne-Marie Gulde, Marc Quintyn, and Leslie Tao. 1999. “Financial Sector Crisis and Restructuring: Lessons from Asia.” IMF Occasional Paper 188.
Mody, Ashoka. 2004. “What Is an Emerging Market?” IMF Working Paper 04/177, forthcoming in Georgetown Journal of International Law.
Nicolo, Gianni, Patrick Honohan, and Alain Ize. 2003. “Dollarization of the Banking System: Good or Bad?” IMF Working Paper 03/146.
Reinhart, Carmen, Kenneth Rogoff, and Miguel Savastano. 2003. “Debt Intolerance.” Brookings Papers on Economic Activity 1 (Spring): 1–74.
Rodrik, Dani. 1999. “Where Did All the Growth Go? External Shocks, Social Conflict, and Growth Collapses.” Journal of Economic Growth 4 (4): 385–413.
Satyanath, Shanker, and Arvind Subramanian. 2004. “What Determines Long-Run Macroeconomic Stability? Democratic Institutions.” IMF Working Paper 04/215.
Savastano, Miguel. 1996. “Dollarization in Latin America — Recent Evidence and Some Policy Issues.” In The Macroeconomics of International Currencies, ed. Paul Mizen and Eric Pentecost. Edward Elgar Publishing.