TY  - JOUR
AU  - Yeyati, Eduardo Levy
TI  - Liquidity Insurance in a Financially Dollarized Economy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12345
PY  - 2006
Y2  - June 2006
DO  - 10.3386/w12345
UR  - http://www.nber.org/papers/w12345
L1  - http://www.nber.org/papers/w12345.pdf
N1  - Author contact info:
Eduardo Levy Yeyati
Universidad Torcuato Di Tella
Escuela de Economia Empresarial
Minones 2177 (1428) Buenos Aires
ARGENTINA
Tel: 5411 4787-9349
Fax: 5411 47833220
E-Mail: ely@utdt.edu
M1  - published as Eduardo Levy Yeyati. "Liquidity Insurance in a Financially Dollarized Economy," in Sebastian Edwards and Márcio G. P. Garcia, editors, "Financial Markets Volatility and Performance in Emerging Markets" University of Chicago Press (2008)

M2  - featured in NBER digest on 2019-03-26
AB  - Unlike the financial dollarization (FD) of external liabilities, the dollarization of domestic financial assets (domestic FD) has received comparatively less attention until very recently, when it has been increasingly seen as a key source of balance sheet exposure. This paper focuses on a complementary %u2013and often overlooked%u2013 angle of domestic FD: the limit it imposes on the central bank as domestic lender of last resort, and the resulting exposure to dollar liquidity runs. The paper discusses the incidence of FD on banking crisis propensity, shows that FD has been an important motive for self insurance in the form of international reserves, and highlights the moral hazard associated with centralized reserve accumulation. Next, it illustrates the authorities%u2019 belated recourse to suspension of convertibility in two recent banking crises (Argentina 2001 and Uruguay 2002). Finally, it argues for a combined scheme of decentralized reserves (liquid asset requirements on individual banks) to limit moral hazard, and an ex-ante suspension-of-convertibility clause (%u201Ccircuit breakers%u201D) to reduce self-insurance costs while limiting bank losses in the event of a run.
ER  -