We develop a novel financial market model in which the stock markets of two countries are linked via and with the foreign exchange market. To be precise, there are domestic and foreign speculators in each of the two stock markets which rely either on linear technical or linear fundamental trading strategies to determine their orders. Since foreign stock market speculators require foreign curren...

Abstract Financial crises and currency instabilities within developing and emerging economies during the last decade had a tremendous impact on the economic performance and increased vulnerability of economies against domestic and foreign shocks. The timing of capital liberalization is one of the significant debates among other issues related to currency instability, and it would be more conven...

We analyze the effect of European Union (EU) membership on financial dollarization for the Central and Eastern European countries. Using a unique monthly dataset that spans about two decades, we find that both the accession process toward EU membership and EU entry have a direct impact on deposit and loan dollarization. EU membership reduces deposit dollarization while it increases loan dollari...

This paper builds a general equilibrium model with working capital and currency substitution and uses this model to assess welfare gains from disin‡ation. It is found that welfare gains from disin‡ation are higher when the baseline in‡ation rate and the elasticity of substitution between foreign currency and domestic deposits are higher. Indeed the gains from disin‡ation can be quite large comp...

What political institutions improve property rights? Building on the work of North and Weingast, this article argues that institutional checks on policymaking discretion (“veto players”) improve the property rights of investors regarding the value of the domestic currency. Veto players constrain the ability of policy makers to opportunistically pursue policy that may lead to a depreciated domes...

Ecuador and El Salvador have recently adopted the U.S. dollar as legal tender, replacing their own national currencies.1 This same move has received serious attention in policy debates in both Argentina and Mexico. Abandoning the national currency is a decision with far-reaching economic and political implications that are not well understood. In response to this phenomenon, a growing literatur...