Liability Dollarization and the Bank Balance Sheet Channel

David Cook, Woon Gyu Choi
2002 IMF Working Papers  
Banks in developing economies often face a mismatch in the currency denomination of their liabilities (foreign currency denominated debt incurred from foreign lenders) and assets (domestic currency loans to domestic borrowers). We study the e¯ect of this mismatch on business cycles and monetary policy in a sticky price, dynamic general equilibrium model of a small open economy. In the model, a°xed exchange rate rule that stabilizes the balance sheets of banks o¯ers greater stability than would
more » ... ability than would an interest rate rule that targets in ation in the sticky price sector of the economy.
doi:10.5089/9781451856194.001 fatcat:mnphi6gsabdbdle6g4ygnia3ii