The mechanics of bank lending to resident borrowers in foreign currency in order to buy properties for domestic currency is given. It is shown that a bank may open a virtual position in a foreign currency, even not having the foreign currency in its vaults. Herewith, virtual cash flows and...

This paper explores the hypothesis that the dollarization of liabilities in emerging market economies is the result of a lack of monetary credibility. I present a model in which firms choose the currency composition of their debts so as to minimize their probability of default. Decreasing...