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Dollarization, Bailouts, and the Stability of the Banking System
2001
Social Science Research Network
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
doi:10.2139/ssrn.276655
fatcat:ld3dalsaeff3rfdwxbaz4kpnt4