Publishing Institution: Institute for Advanced Development Studies (INESAD) / Topic: Dollarization

Author:: Carlos Gustavo Machiado Salas
Publication Date:: 01-2007
Content Type:: Working Paper
Institution:: Institute for Advanced Development Studies (INESAD)
Abstract:: This article illustrates how the industrial organization of a banking system affects economic growth in a partially dollarized economy. I study a model where banking competition has some potentially good and some potentially bad effects for growth. I analyze how important they are quatitatively and, surprisingly, they do not seem to matter much. The main reason for this is that while competition leads banks to offer consumers a "better deal" on their deposits, this does not lead to a large increase in the savings rate. The effect depends on the main structural parameter values of the economy. In particular, if there is a high demand for liquidity insurance. I calibrate the model for the Bolivian economy and show that the growth rates under both systems are not significantly different.
Topic:: Economy, Economic Growth, Banking, and Dollarization
Political Geography:: South America and Bolivia

Author:: Carlos Gustavo Machicado
Publication Date:: 09-2006
Content Type:: Working Paper
Institution:: Institute for Advanced Development Studies (INESAD)
Abstract:: This paper shows how uncertainty about liquidity demand can lead to a high degree of dollarization in the banking system. I study a model where the demand for currency in each period is random, and where it is easier for banks to borrow in local currency in times of crisis than in dollars. Banks choose a portfolio composed of local currency, dollars, and real loans. Compared to the anticipated transactions demand for each currency, I show that the bank will hold a relatively large amount of dollars and a relatively small amount of local currency. I also show the existence of a dollarization multiplier : as the anticipated transactions demand for dollars increases, the dollarization of the banking sector increases more than proportionately
Topic:: Banking, Banking Crisis, Liquidity, and Dollarization
Political Geography:: Global Focus

Author:: Carlos Gustavo Machicado
Publication Date:: 09-2006
Content Type:: Working Paper
Institution:: Institute for Advanced Development Studies (INESAD)
Abstract:: This paper evaluates welfare under optimal monetary and fiscal policy in a dynamic stochastic model of currency substitution and capital. It shows that in a partially dollarized economy, the main optimal policy results, i.e. the Friedman Rule and the zero capital tax, hold. Welfare implications of these optimal policies are computed for the Bolivian economy using a second-order approximation technique. The primary conclusions are that the welfare gains under optimal monetary policy are negligible. The welfare gains when optimal fiscal policy is considered alone or in conjunction with optimal monetary policy are sizable and come from the increase in real variables and also by the increase in real balances in local currency. Thus, welfare gains are negatively related to dollarization.
Topic:: Economics, Monetary Policy, Fiscal Policy, Welfare, and Dollarization
Political Geography:: Global Focus

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