On the Benefits of Dollarization when Stabilization Policy is not Credible and Financial Markets are Imperfect
AbstractThis paper examines two potential benefits that emerging economies may derive from dollarization. First, dollarization may eliminate distortions induced by the lack of credibility of monetary policy. Second, dollarization may weaken financial frictions that result in endogenous credit constraints. The analysis is based on numerical simulations of a two-sector dynamic, stochastic general equilibrium model calibrated to Mexican data. The results indicate that policy uncertainty and credit constraints are very costly distortions. The mean welfare gains of eliminating policy uncertainty range between 6.4 and 9 percent of the trend level of consumption per capita. The mean welfare gain of weakening credit frictions is about 4.6 percent.
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Date of creation: Aug 2000
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- Mendoza, Enrique G., 2000. "On the Benefits of Dollarization when Stabilization Policy Is Not Credible and Financial Markets are Imperfect," Working Papers 00-01, Duke University, Department of Economics.
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-08-07 (All new papers)
- NEP-DGE-2000-08-07 (Dynamic General Equilibrium)
- NEP-FMK-2000-08-07 (Financial Markets)
- NEP-PUB-2000-08-07 (Public Finance)
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