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The Effects of Real Exchange Rate Depreciation in an Economy with Extreme Liability Dollarization

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  • Melander, Ola

    ()
    (International Monetary Fund)

Abstract

This paper studies the effects of real exchange rate depreciation in an economy with extreme liability dollarization using vector autoregression (VAR) methods. Bolivia's extreme liability dollarization makes it an interesting case for empirical testing of the contractionary-depreciations hypothesis. In contrast to the previous contractionary-depreciations literature, the paper uses identification assumptions which are inspired by modern macroeconomic theory and common in the empirical VAR literature on the effects of monetary policy. I find that a real exchange rate depreciation has negligible effects on output, since a contractionary balance-sheet effect on investment is counteracted by the standard expansionary effect on net exports. Furthermore, I find that a real depreciation has inflationary effects. A key finding is that the identification assumptions used in this paper gives more reasonable results than alternative assumptions used in the previous literature.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 715.

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Length: 34 pages
Date of creation: 17 Apr 2009
Date of revision: 28 Jul 2009
Handle: RePEc:hhs:hastef:0715

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Related research

Keywords: Real exchange rate; VAR; liability dollarization; balance sheet effects; contractionary depreciation;

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Cited by:
  1. Naeem Ur Rehman Khattak & Muhammad Tariq, 2012. "Are Real Devaluations Contractionary? an Empirical Analysis for Pakistan," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(1), pages 119-134, March.

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