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Exchange Rate Policy in a Dollarized Economy: A CGE Analysis for Bolivia

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Author Info

  • Rainer Schweickert
  • Rainer Thiele
  • Manfred Wiebelt

Abstract

In this paper, a real-financial CGE model is employed for Bolivia to simulate the macroeconomic and distributional effects of exchange rate policy in a highly dollarized economy. Overall, dollarization appears to matter more through real than through financial-sector effects. The main macroeconomic result of the simulations is that the potential of nominal devaluation to smooth the adjustment path after a negative shock primarily depends on the absence of wage indexation. Only if nominal wages are constant in the short run, devaluation reduces unemployment and cushions the reduction of real GDP induced by the shock. Financial de-dollarization tends to be contractionary in Bolivia but different degrees of financial dollarization hardly change the real sector effects. As concerns distributional effects, nominal devaluation in no circumstance reduces the poverty effect of the external shock. Even the significant short-run macroeconomic expansion that occurs without wage indexation does not translate into significant poverty alleviation, which is due to the fact that the real value of transfers received by households decreases in this case.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1255.

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Length: 40 pages
Date of creation: Jul 2005
Date of revision:
Handle: RePEc:kie:kieliw:1255

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Related research

Keywords: Dollarization; Poverty; Computable General Equilibrium Model; Bolivia;

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Cited by:
  1. Stephan Klasen, 2006. "Macroeconomic Policy and Pro-Poor Growth in Bolivia," Ibero America Institute for Econ. Research (IAI) Discussion Papers 143, Ibero-America Institute for Economic Research.

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