Persistence of Dollarization After Price Stabilization

Download or read book Persistence of Dollarization After Price Stabilization written by Veronica Rappoport and published by . This book was released on 2011 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit contracts in developing countries are often denominated in foreign currencies, even after many of these economies succeeded incontrolling inflation. This paper proposes a new interpretation of this apparent puzzle based on the demand for insurance against real shocks: The fact that devaluations occur more frequently in adverse states of the world provides a motive for holding dollar assets. This approach implies a complementarity between the optimal monetary policy and the currency denomination of contracts. When a large proportion of liabilities is denominated in a foreign currency, the optimal exchange rate volatility is low, which reinforces the demand for dollar assets.