The Solution of Crises and the Aftermath
The Solution of Crises and the Aftermath
This chapter tries to find the answer to the question: Do local currencies help in the solution of crises? It discusses how the evidence suggests that local currencies do not help, and actually complicate the solutions for exactly the same reasons that turn them into the trigger which unravels the crises. The solution of crises in countries with local currencies requires calming down two markets in panic—the currency and the financial ones—while in a dollarized country without a local currency, you would deal with only one market. It can also be noticed that the currency market holds the key to resolving the overall crisis. The chapter concludes that bank runs are less likely to happen, are more easily stopped, and are less costly—in terms of recapitalization of the banks—in the formally dollarized economies than in the nondollarized and partially dollarized ones.
Keywords: local currencies, dollarized country, currency market, dollarized economies, recapitalization
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