Reports from Federal Reserve Board Describe Recent Advances in Economics (Devaluations, Deposit Dollarization, and Household Heterogeneity): Economics

2026 FEB 02 (NewsRx) -- By a News Reporter-Staff News Editor at Economics Daily Report -- Investigators publish new report on Economics. According to news originating from Washington, District of Columbia, by NewsRx correspondents, research stated, “We study the aggregate and redistributive effects of currency devaluations in a small open economy model with leverage-constrained banks and heterogeneous households. Our framework captures three stylized facts about financial dollarization in emerging economies: (1) a sizable share of domestic deposits is denominated in foreign currency; (2) these deposits represent significant foreign currency liabilities for local banks; and (3) dollar deposits are mainly held by wealthier households.”

Our news journalists obtained a quote from the research from Federal Reserve Board, “A devaluation increases the real burden of foreign currency debt, causing an erosion of banks’ net worth, which depresses credit supply and economic activity. While richer households are partially insulated through their dollar deposits, poorer households cut consumption sharply in response to rising borrowing costs and falling real labor income. In our model deposit, dollarization amplifies the contractionary effects of a devaluation on output, investment, and consumption, in line with new empirical evidence for emerging economies. To achieve this result, both constrained intermediaries and heterogeneous households are crucial.”

According to the news editors, the research concluded: “In our framework, regulating dollarization can result in widespread welfare gains, especially for poorer households.”

This research has been peer-reviewed.

For more information on this research see: Devaluations, Deposit Dollarization, and Household Heterogeneity. Review of Economic Studies, 2026. Review of Economic Studies can be contacted at: Oxford Univ Press, Great Clarendon St, Oxford OX2 6DP, England. (Oxford University Press - http://www.oup.com/; Review of Economic Studies - restud.oxfordjournals.org)

The news correspondents report that additional information may be obtained from Nils Gornemann, Federal Reserve Board, Division of International Finance, Washington, DC 20551, United States.

The direct object identifier (DOI) for that additional information is: https://doi.org/10.1093/restud/rdaf109. This DOI is a link to an online electronic document that is either free or for purchase, and can be your direct source for a journal article and its citation.

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