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

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  • Cabral, René

Abstract

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.

Suggested Citation

  • Cabral, René, 2010. "Why dollarization didn't succeed: Comparing credibility and the impact of real shocks on small open economies," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 297-313, December.
  • Handle: RePEc:eee:ecofin:v:21:y:2010:i:3:p:297-313
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    References listed on IDEAS

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    Cited by:

    1. Marina Tkalec, 2013. "The Dynamics of Deposit Euroization in European Post-Transition Countries: Evidence from Threshold VAR," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), pages 66-83.
    2. Marina Tkalec, 2013. "The Dynamics of Deposit Euroization in European Post-Transition Countries: Evidence from Threshold VAR," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), pages 66-83.
    3. Cabral,Rene & Carneiro,Francisco Galrao & Mollick,Andre Varella, 2016. "Inflation targeting and exchange rate volatility in emerging markets," Policy Research Working Paper Series 7712, The World Bank.
    4. Best, Gabriela, 2013. "Fear of floating or monetary policy as usual? A structural analysis of Mexico's monetary policy," The North American Journal of Economics and Finance, Elsevier, pages 45-62.

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