European Business Schools Librarian's Group
ESSEC Working Papers,
ESSEC Research Center, ESSEC Business School
No DR 04001: Excessive Liability Dollarization in a Simple Signaling Model
Damien Besancenot () and Radu Vranceanu ()
Additional contact information
Damien Besancenot: Université de Paris 2, Postal: 92, rue d'Assas, 75006 Paris, FRANCE
Radu Vranceanu: ESSEC Business School, Postal: Avenue Bernard Hirsch - B.P. 105, 95021 CERGY-PONTOISE CEDEX , FRANCE
Abstract: If a dollar denominated external debt comes with so many risks, why do emerging economies allow for such an imbalance to accumulate ? The explanation provided in this paper builds on a simple signaling model. By assumption, lenders have no direct possibility to infer a firm’s financial stance. Therefore sound firms might want to borrow dollars and bear a high clearance cost, just in order to signal their type. The success of this policy depends on the behavior of bad firms. When dollar borrowing clearance costs are relatively small with respect to the clearance cost of borrowing in the local currency, the whole private sector would opt for liability dollarization. In this case the signaling effect vanishes, while all firms bear high clearance costs.
Keywords: Original sin; Signaling; Developing countries; Liability dollarization; Perfect Bayesian Equilibrium
26 pages, January 2004
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