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Why dollarization didn't succeed: Comparing credibility and the impact of real shocks on small open economies

  • Cabral, René

This paper compares credibility and the impact of real shocks on a small open economy operating under two opposite corner solutions: a flexible exchange rate and official dollarization. Using an asymmetric two-country model, we show that although dollarization is an effective device to achieve price stability and avoid credibility problems, small open economies might be better off under a flexible regime than under dollarization following any symmetric or asymmetric shock. We also show that even when a small economy follows "fear of floating" practices, the costs of stabilization are smaller than those under dollarization. We interpret these results as consistent with the demise of the dollarization debate.

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Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 21 (2010)
Issue (Month): 3 (December)
Pages: 297-313

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Handle: RePEc:eee:ecofin:v:21:y:2010:i:3:p:297-313
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620163

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  10. Roberto Chang, 2000. "Dollarization: a scorecard," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 1-12.
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  12. Martin, Philippe, 1995. "Free-riding, convergence and two-speed monetary unification in Europe," European Economic Review, Elsevier, vol. 39(7), pages 1345-1364, August.
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