- Steven Weisbrod, and Liliana Rojas-Suárez
- Published Date:
- October 1995
Assume that the authorities impose reserve requirements on the following:
domestic-currency-denominated deposits = k = 10 percent
foreign-currency-denominated deposits = j = 20 percent
Assume also that transactions that must be effected in domestic currency (payment for taxes, for example) are such that the public needs to hold a minimum of deposits denominated in domestic currency equal to $10. For simplicity, assume that the public holds no cash, so that its entire financial wealth takes the form of bank deposits. The exchange rate between U.S. dollars and domestic currency is assumed to equal 1.
An initial position can be characterized as follows (where bank capital has been netted out in the accounts):
|Domestic currency = 10||Domestic currency = 100|
|U.S. dollars = 20||U.S. dollars = 100|
|Domestic currency = 90|
|U.S. dollars = 80|
|Foreign exchange||Monetary base = 10|
|reserves = 30||Bank deposits in U.S. dollars = 20|
A lack of confidence in the announced exchange rate may lead to a shift away from the domestic currency. Hypothetically, if no other change occurs, the balance sheet may look as follows in the instant immediately after the shift away from domestic deposits.1
|Domestic currency = 0||Domestic currency = 0|
|U.S. dollars = 30||U.S. dollars = 200|
|Domestic currency = 90|
|U.S. dollars = 80|
|Foreign exchange||Monetary base = 0|
|reserves = 30||Bank deposits in U.S. dollars = 30|
Because the monetary authorities will not accommodate a speculative attack on the domestic currency, the interest rate on domestic-currency-denominated loans will rise. The increase will prevent a currency restructuring of domestic currency loans.
In the above balance sheets, banks are not satisfying reserve requirements in U.S. dollars, and, there-fore, that position is a disequilibrium one that could exist for only a brief time. The position also shows a mismatch in the currency composition of banks’ assets and liabilities. As the existing stock of loans de-nominated in domestic currency expires and as the public need to hold a minimum of $10 in domestic-currency-denominated deposits becomes binding, a possible outcome may be:
|Domestic currency = I||Domestic currency = 10|
|U.S. dollars = 29||U.S. dollars = 145|
|Domestic currency = 9|
|U.S. dollars = 116|
|Foreign exchange||Monetary base = I|
|reserves = 30||Bank deposits in U.S. dollars = 29|
In this outcome, the dollarization process has strengthened and will remain strong unless the public becomes convinced of the monetary authorities’ commitment to the exchange rate. Also, owing to a reserve requirement on U.S. dollar deposits higher than that on domestic-currency-denominated deposits, the new equilibrium involves a lower level of total loans to the economy. Notice that if k = j, total loans will have remained unchanged.
The dynamics toward the final position could take a variety of forms. The example presented here is chosen only for illustrative purposes.
The Argentine Banking Crisis of 1980” in Banking Crises: Cases and Issues, ed. by TomásJ.T.Baliño and V.Sundararajan (Washington: International Monetary Fund, 1991).“
The Role of Financial Institutions in the Transition to a Market Economy” in Building Sound Finance in Emerging Market Economies, ed. by GerardCaprio, DavidFolkerts-Landau, and Timothy D.Lane (Washington: International Monetary Fund, 1994).“
The Perils of Sterilization” Staff Papers, International Monetary Fund, Vol. 38 (December1991), pp. 921–26.“
Capital Inflows to Latin America: The 1970s and the 1990s” IMF Working Paper No. 92/85 (Washington: International Monetary Fund, October1992).“
1993a) “Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors” Staff Papers, International Monetary Fund, Vol. 40 (March), pp. 108–51.(
1993b) “The Capital Inflows Problem: Concepts and Issues” IMF Paper on Policy Assessment and Analysis No. 93/10 (Washington: International Monetary Fund).(
Currency Substitution in Developing Countries: An Introduction” Revista de Análisis Económico, Vol. 7 (June1992), pp. 3–27.“
Credibility and the Dynamics of Stabilization Policy: A Basic Framework” IMF Working Paper No. 90/110 (Washington: International Monetary Fund, 1990).“
Claessens, Stijn, and SudarshanGooptu,eds., Portfolio Investment in Developing Countries, World Bank Discussion Paper No. 228 (Washington: World Bank, 1993).
Macroeconomic Adjustment to Portfolio Capital Inflows: Rationale and Some Recent Experiences” in Portfolio Investment in Developing Countries, ed. by StijnClaessens and SudarshanGooptu,World Bank Discussion Paper No. 228 (Washington, December1993), pp. 353–71.“
others, El Sistema Bancario Chileno: Desarrollos Recientesy sus Perspectivas, Instituto de Economía, Pontificia Universidad Catolica de Chile (1992).and
Balancing Progressive Change and Caution in Reforming the Financial System” Federal Reserve Bank of New York, Quarterly Review, Vol. 16(Summer1991), pp. 1–12.“
Anatomy of the Medium-Term Note Market” Federal Reserve Bulletin, Vol. 79 (August1993), pp. 751–68.“
Zahlenubersichten und Methodische Erlauterungen Zur gesamtwirtschaftlichen Finanzierungsrechnung der Deutschen Bundesbank 1960/89 (Frankfurt am Main, 1992).
What’s Different About Banks?” Journal of Monetary Economics, Vol. 15 (January1985), pp. 29–39.“
Emerging Equity Markets: Growth, Benefits, and Policy Concerns,” IMF Paper on Policy Analysis and Assessment No. 94/7 (Washington: International Monetary Fund, March1994).“
1984a) “Collapsing Exchange Rate Regimes: Some Linear Examples” Journal of International Economics, Vol. 17 (August), pp. 1–13.(
1984b), “Gold Monetization and Gold Discipline” Journal of Political Economy, Vol. 92 (February1984), pp. 90–107.(
The Economics of Banking, Liquidity, and Money (Lexington, Massachusetts: D.C. Heath, 1992).
International Finance Corporation, Emerging Stock Markets: Factbook (Washington: International Finance Corporation), various issues.
International Finance Corporation, Quarterly Review of Emerging Markets, Fourth Quarter 1993 (Washington: International Finance Corporation, 1993).
International Monetary Fund, International Capital Markets: Developments, Prospects, and Policy Issues (Washington: International Monetary Fund, September1992).
International Monetary Fund, Private Market Financing for Developing Countries (Washington: International Monetary Fund, 1993).
International Monetary Fund, World Economic Outlook (Washington), various issues.
International Monetary Fund, International Financial Statistics (Washington), various issues.
Some Evidence on the Uniqueness of Bank Loans” Journal of Financial Economics, Vol. 19 (1987), pp. 217–36.“
A Model of Balance-of-Payments Crises” Journal of Money, Credit and Banking, Vol. 11 (August1979), pp. 311–25.“
Liberalization of the Capital Account: Experiences and Is-sues, IMF Occasional Paper No. 103 (Washington: International Monetary Fund, 1993).
Mexico, Comisión Nacional Bancaria, Boletín Estadístico de la Banca Múltiple (Mexico City, 1994).
Latin America’s Banking Systems in the 1980s—A Cross-Country Comparison, World Bank Discussion Paper No. 81 (Washington: World Bank, (1990).
Rational and Self-Fulfilling Balance-of-Payments Crises” American Economic Review, Vol. 76 (March1986), pp. 72–81.“
Risk and Capital Flight in Developing Countries” in Determinants and Systemic Con-sequences of International Capital Flows, IMF Occasional Paper No. 77 (Washington: International Monetary Fund, 1991).“
An Analysis of the Linkages of Macroeconomic Policies in Mexico” in Mexico: The Strategy to Achieve Sustained Economic Growth, ed. by ClaudioLoser and EliotKalter,IMF Occasional Paper No. 99 (Washington: International Monetary Fund, 1992).“
Corporate Financial Structures in Developing Countries, IFC Technical Paper No. 1 (Washington: International Finance Corporation, 1992).
Sundararajan, V., and Tomás J.T.Balifio,eds., Banking Crises: Cases and Issues (Washington: International Monetary Fund, 1991).
United States, Board of Governors of the Federal Reserve System, Balance Sheets for the U.S. Economy 1986–91 (Washington, 1992).
Liberalization, Crisis, Intervention: The Chilean Financial System, 1975–85” in Banking Crises: Cases and Issues, ed. by Tomás J.T.Balifio and V.Sundararajan (Washington: International Monetary Fund, 1991).“
Role of Financial Intermediaries during Asset Deflations: Case Studies of Japan, Korea, and Taiwan” in Portfolio Investment in Developing Countries, ed. by StijnClaessens and Sudarshan, Gooptu,World Bank Discussion Paper No. 228 (Washington: World Bank, Howard Lee, 1993).“
Recent Occasional Papers of the International Monetary Fund
132. Financial Fragilities in Latin America: The 1980s and 1990s, by Liliana Rojas-Suárez and Steven R. Weisbrod. 1995.
131. Capital Account Convertibility: Review of Experience and Implications for IMF Policies, by staff teams headed by Peter J. Quirk and Owen Evans. 1995.
130. Challenges to the Swedish Welfare State, by Desmond Lachman, Adam Bennett, John H. Green, Robert Hagemann, and Ramana Ramaswamy. 1995.
129. IMF Conditionality: Experience Under Stand-By and Extended Arrangements. Part II: Background Papers. Susan Schadler, Editor, with Adam Bennett, Maria Carkovic, Louis Dicks-Mireaux, Mauro Mecagni, James H.J. Morsink, and Miguel A. Savastano. 1995.
128. IMF Conditionality: Experience Under Stand-By and Extended Arrangements. Part I: Key Issues and Findings, by Susan Schadler, Adam Bennett, Maria Carkovic, Louis Dicks-Mireaux, Mauro Mecagni, James H.J. Morsink, and Miguel A. Savastano. 1995.
127. Road Maps of the Transition: The Baltics, the Czech Republic, Hungary, and Russia, by Tapio O. Saavalainen, Biswajit Banerjee, Mark S. Lutz, Thomas Krueger, Vincent Koen, and Michael Marrese. 1995.
126. The Adoption of Indirect Instruments of Monetary Policy, by a Staff Team headed by William E. Alexander, Tomás J.T. Baliño, and Charles Enoch and comprising Francesco Caramazza, George Iden, David Marston, Johannes Mueller, Ceyla Pazarbasioglu, Marc Quintyn, Matthew Saal, and Gabriel Sensen-brenner. 1995.
125. United Germany: The First Five Years—Performance and Policy Issues, by Robert Corker, Robert A. Feldman, Karl Habermeier, Hari Vittas, and Tessa van der Willigen. 1995.
124. Saving Behavior and the Asset Price “Bubble” in Japan: Analytical Studies, edited by Ulrich Baumgartner and Guy Meredith. 1995.
123. Comprehensive Tax Reform: The Colombian Experience, edited by Parthasarathi Shome. 1995.
122. Capital Flows in the APEC Region, edited by Mohsin S. Khan and Carmen M. Reinhart. 1995.
121. Uganda: Adjustment with Growth, 1987–94, by Robert L. Sharer, Hema R. De Zoysa, and Calvin A. McDonald. 1995.
120. Economic Dislocation and Recovery in Lebanon, by Sena Eken, Paul Cashin, S. Nuri Erbas, Jose Martelino, and Adnan Mazarei. 1995.
119. Singapore: A Case Study in Rapid Development, edited by Kenneth Bercuson with a staff team comprising Robert G. Carling, Aasim M. Husain, Thomas Rumbaugh, and Rachel van Elkan. 1995.
118. Sub-Saharan Africa: Growth, Savings, and Investment, by Michael T. Hadjimichael, Dhaneshwar Ghura, Martin Mühleisen, Roger Nord, and E. Murat Uçer. 1995.
117. Resilience and Growth Through Sustained Adjustment: The Moroccan Experience, by Saleh M. Nsouli, Sena Eken, Klaus Enders, Van-Can Thai, Jörg Decressin, and Filippo Cartiglia, with Janet Bungay. 1995.
116. Improving the International Monetary System: Constraints and Possibilities, by Michael Mussa, Morris Goldstein, Peter B. Clark, Donald J. Mathieson, and Tamim Bayoumi. 1994.
115. Exchange Rates and Economic Fundamentals: A Framework for Analysis, by Peter B. Clark, Leonardo Bartolini, Tamim Bayoumi, and Steven Symansky. 1994.
114. Economic Reform in China: A New Phase, by Wanda Tseng, Hoe Ee Khor, Kalpana Kochhar, Dubravko Mihaljek, and David Burton. 1994.
113. Poland: The Path to a Market Economy, by Liam P. Ebrill, Ajai Chopra, Charalambos Christofides, Paul Mylonas, Inci Otker, and Gerd Schwartz. 1994.
112. The Behavior of Non-Oil Commodity Prices, by Eduardo Borensztein, Mohsin S. Khan, Carmen M. Reinhart, and Peter Wickham. 1994.
111. The Russian Federation in Transition: External Developments, by Benedicte Vibe Christensen. 1994.
110. Limiting Central Bank Credit to the Government: Theory and Practice, by Carlo Cottarelli. 1993.
109. The Path to Convertibility and Growth: The Tunisian Experience, by Saleh M. Nsouli, Sena Eken, Paul Duran, Gerwin Bell, and Zuhtü Yücelik. 1993.
108. Recent Experiences with Surges in Capital Inflows, by Susan Schadler, Maria Carkovic, Adam Bennett, and Robert Kahn. 1993.
107. China at the Threshold of a Market Economy, by Michael W. Bell, Hoe Ee Khor, and Kalpana Kochhar with Jun Ma, Simon N’guiamba, and Rajiv Lall. 1993.
106. Economic Adjustment in Low-Income Countries: Experience Under the Enhanced Structural Adjustment Facility, by Susan Schadler, Franek Rozwadowski, Siddharth Tiwari, and David O. Robinson. 1993.
105. The Structure and Operation of the World Gold Market, by Gary O’Callaghan. 1993.
104. Price Liberalization in Russia: Behavior of Prices, Household Incomes, and Consumption During the First Year, by Vincent Koen and Steven Phillips. 1993.
103. Liberalization of the Capital Account: Experiences and Issues, by Donald J. Mathieson and Liliana Rojas-Suárez. 1993.
102. Financial Sector Reforms and Exchange Arrangements in Eastern Europe. Part I: Financial Markets and Intermediation, by Guillermo A. Calvo and Manmohan S. Kumar. Part II: Exchange Arrangements of Previously Centrally Planned Economies, by Eduardo Borensztein and Paul R. Masson. 1993.
101. Spain: Converging with the European Community, by Michel Galy, Gonzalo Pastor, and Thierry Pujol. 1993.
100. The Gambia: Economic Adjustment in a Small Open Economy, by Michael T. Hadjimichael, Thomas Rumbaugh, and Eric Verreydt. 1992.
99. Mexico: The Strategy to Achieve Sustained Economic Growth, edited by Claudio Loser and Eliot Kalter. 1992.
98. Albania: From Isolation Toward Reform, by Mario I. Blejer, Mauro Mecagni, Ratna Sahay, Richard Hides, Barry Johnston, Piroska Nagy, and Roy Pepper. 1992.
97. Rules and Discretion in International Economic Policy, by Manuel Guitián. 1992.
96. Policy Issues in the Evolving International Monetary System, by Morris Goldstein, Peter Isard, Paul R. Masson, and Mark P. Taylor. 1992.
95. The Fiscal Dimensions of Adjustment in Low-Income Countries, by Karim Nashashibi, Sanjeev Gupta, Claire Liuksila, Henri Lorie, and Walter Mahler. 1992.
94. Tax Harmonization in the European Community: Policy Issues and Analysis, edited by George Kopits. 1992.
93. Regional Trade Arrangements, by Augusto de la Torre and Margaret R. Kelly. 1992.
92. Stabilization and Structural Reform in the Czech and Slovak Federal Republic: First Stage, by Bijan B. Aghevli, Eduardo Borensztein, and Tessa van der Willigen. 1992.
91. Economic Policies for a New South Africa, edited by Desmond Lachman and Kenneth Bercuson with a staff team comprising Daudi Ballali, Robert Corker, Charalambos Christofides, and James Wein. 1992.
90. The Internationalization of Currencies: An Appraisal of the Japanese Yen, by George S. Tavlas and Yuzuru Ozeki. 1992.
89. The Romanian Economic Reform Program, by Dimitri G. Demekas and Mohsin S. Khan. 1991.
88. Value-Added Tax: Administrative and Policy Issues, edited by Alan A. Tait. 1991.
87. Financial Assistance from Arab Countries and Arab Regional Institutions, by Pierre van den Boogaerde. 1991.
86. Ghana: Adjustment and Growth, 1983–91, by Ishan Kapur, Michael T. Hadjimichael, Paul Hilbers, Jerald Schiff, and Philippe Szymczak. 1991.
85. Thailand: Adjusting to Success—Current Policy Issues, by David Robinson, Yangho Byeon, and Ranjit Teja with Wanda Tseng. 1991.
84. Financial Liberalization, Money Demand, and Monetary Policy in Asian Countries, by Wanda Tseng and Robert Corker. 1991.
83. Economic Reform in Hungary Since 1968, by Anthony R. Boote and Janos Somogyi. 1991.
Note: For information on the title and availability of Occasional Papers not listed, please consult the IMF Publications Catalog or contact IMF Publication Services.