The Myth of the Lender of Last Resort
The Myth of the Lender of Last Resort
This chapter discusses why governments need dollars to support the local currency. First, it explains that dollars are needed to print domestic currency because financial crises in developing countries are always associated with currency runs. Second, dollars are needed to cover the dollar foreign obligations of the domestic banks that are coming due and are not being rolled over. These two reasons exist in all developing countries, even in those where dollar deposits are not allowed. The third reason is the dollar deposits. The chapter discusses how the need for dollars becomes more pressing when the possibility of capital outflows and dollar deposits withdrawals is taken into account. In this case, demand for dollars may reach 100 percent of the money created in the first round.
Keywords: local currency, financial crises, developing countries, domestic banks, capital outflows
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