LENDING OF LAST RESORT, BANK MONITORING AND ENDOGENOUS FINANCIAL DOLLARIZATION

Abstract

This paper extends a recent study on financial dollarization of Broda and Levy Yeyati (2003) by introducing a lending of last resort intervention contingent both on banks’ portfolio currency composition and on banks’ monitoring effort. We show that when the lender of last resort commitment to intervene is matched with some operational discretion, according to a “constructive ambiguity” approach, then the provision of emergency liquidity may be crucial to enable distressed, but well-behaved banks, to survive and finance “high quality” investment projects.

Citation

Corrado, G. (2005), "LENDING OF LAST RESORT, BANK MONITORING AND ENDOGENOUS FINANCIAL DOLLARIZATION", Arbelaez, H. and Click, R.W. (Ed.) Latin American Financial Markets: Developments in Financial Innovations (International Finance Review, Vol. 5), Emerald Group Publishing Limited, Leeds, pp. 163-188. https://doi.org/10.1016/S1569-3767(05)05009-0