Ebook: Assessing Financial Vulnerability in Partial Dollarized Economies

The reduction of macroeconomic vulnerability in emerging markets is at the core of the research agenda.
Liability dollarization plays a vital role and its implications have been addressed in the literature via a
“financial accelerator” mechanism. If we asses vulnerability in terms of the evolution of investment, we
claim that, in absence of an asset price channel, departures from a pure float will mitigate vulnerability
and improve welfare. Conversely, with an active asset price channel a tighter exchange rate policy will
have marginal effects on welfare and vulnerability when compared to that associated to a reduction in
liability dollarization.
Key words: Liability dollarization, financial vulnerability, fear of floating, monetary policy.