This paper explores the role of restrictions on the use of international reserves as economic sanctions. We develop a simple model of the strategic game between a sanctioning (creditor) country and a sanctioned (debtor) country. We show how the sanctioning country should impose restrictions...

The opening up of an economy to the rest of the world has generally been considered an integral part of economic reform aimed at increasing the role of markets. Until recently, however, very little discussion was devoted to the order in which the capital and current account should be liberalized...

This paper extends a New Keynesian model to include roles for currency and deposits as competing sources of liquidity services demanded by households. It shows that, both qualitatively and quantitatively, the Barnett critique applies: While a Divisia aggregate of monetary services tracks the...

The paper examines possible monetary policy strategies for Latin America that may help lock-in the gains in the fight against inflation attained by the region during the 1990s. We start by calling for a refocus of the debate about the conduct of monetary policy away from thinking that it is...

This paper pushes back against two views about the effects of dollarization. First, there is a view that the dollar is a device by which rich countries provide business cycle insurance to emerging market (EME) countries. We find that the dollar is important for risk sharing, but the evidence...

The paper explores optimizing models of small open economies that hold foreign money balances. Particular attention is paid to the impact of foreign inflation on the real exchange rate and other real variables. At first, an environment in which foreign money is the only traded asset is explored....

Undesirable real effects have been attributed to floating exchange rates in general, and the 1980-83 appreciation of the dollar in particular.In the appreciating country, the U.S., export industries lose competitiveness and so output falls. In the other country, say Europe, the exchange rate...

This paper is concerned with the reasons why some currencies, such as the pound sterling and the U.S. dollar, have come to serve as "vehicles" for exchanges of other currencies. It develops a three-country model of payments equilibrium with transaction costs, and shows how one currency can...

This paper studies the dollarization of prices in retail markets of emerging economies. We develop a model of the firm's optimal currency choice in retail markets in inflationary economies. We derive theoretical predictions regarding the optimality of dollar pricing, and test them using data...

We establish that macroprudential policies limiting capital flows can curb risks arising from corporate foreign currency borrowing in emerging markets. Using detailed firm-level data from India, we show that propensity to issue foreign currency debt for the same firm is higher when the...