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The Effects of Dollarization on Macroeconomic Stability

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  • Christopher J. Erceg and Andrew T. Levin

Abstract

Recently, several countries have been considered the relative merits of "dollarization", that is, adopting the currency of an anchor country. One of the main potential costs of dollarization is that macroeconomic stability may be reduced by the loss of monetary policy autonomy. In this paper, we formlate a two-country open economy model with optimizing agents and nominal wage and price inertia. Using this model, we consider the extent to which the stabilization costs of dollarization are affected by the relative variability of foreign and domestic productivity and government spending shocks. We also consider the influence of certain key structural characteristics such as the relative size of the tradeable and non-tradeable sectors and the elasticity of foreign demand for domestically- produced tradeable goods. In light of these results, we evaluate the stabilization costs associated with dollarization for each of the 14 developing country blocks of the FRB/Global macroeconometric model.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 17.

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Date of creation: 01 Apr 2001
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Handle: RePEc:sce:scecf1:17

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Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html
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Keywords: monetary policy; currency unions; exchange rate regimes;

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Cited by:
  1. Kollmann, Robert, 2002. "Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles," CEPR Discussion Papers 3279, C.E.P.R. Discussion Papers.

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