IDEAS home Printed from https://ideas.repec.org/a/eme/jespps/v35y2008i1p69-93.html
   My bibliography  Save this article

An open economy model with currency substitution and real dollarization

Author

Listed:
  • Germana Corrado

Abstract

Purpose - The paper aims at developing a theoretical model forde factodollarized small open economies focusing on currency substitution and nominal wages indexation to the exchange rate. Design/methodology/approach - The analysis is performed in a general equilibrium “New Open Economy Macroeconomics” framework with nominal rigidities and imperfect competition in the nontraded good sector. Findings - The paper finds that a dollar‐indexed economy with low degrees of payments/financial dollarization could experience higher costs in terms of exchange rate and output fluctuations when nominal shocks dominate real shocks, making stabilization programs more difficult to achieve in a rapid and less costly way. Practical implications - The speed of adjustment of macro variables is faster in the highly dollarized economy as a response to a higher and more volatile inflation rate. A higher level of financial dollarization increases the frequency of domestic prices and wages revisions to nominal exchange rate shocks. This might explain, in turn, why nominal disturbances are shorter lived in the higher dollarized economies, and the asymmetry between financial and real dollarization Originality/value - Contrary to the “conventional wisdom” that predicts a positive relationship between the degrees of dollarization and the exchange rate pass‐through, our model shows that the degree of dollarization and the degree of dollar indexation are not necessarily the same or even correlated.

Suggested Citation

  • Germana Corrado, 2008. "An open economy model with currency substitution and real dollarization," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 35(1), pages 69-93, January.
  • Handle: RePEc:eme:jespps:v:35:y:2008:i:1:p:69-93
    DOI: 10.1108/01443580810844433
    as

    Download full text from publisher

    File URL: https://www.emerald.com/insight/content/doi/10.1108/01443580810844433/full/html?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers

    File URL: https://www.emerald.com/insight/content/doi/10.1108/01443580810844433/full/pdf?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers

    File URL: https://libkey.io/10.1108/01443580810844433?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Süleyman Hilmi KAL, 2019. "2003-2018 Dönemi Türk Ekonomisinde Dolarizasyon, Kısa Vadeli Sermaye Hareketleri ve Kur Oynaklığı İlişkisi," Istanbul Journal of Economics-Istanbul Iktisat Dergisi, Istanbul University, Faculty of Economics, vol. 69(2), pages 357-377, December.
    2. Yinusa, D. Olalekan, 2009. "Macroeconomic Fluctuations and Deposit Dollarization in Sub-Saharan Africa: Evidence from Panel Data," MPRA Paper 16259, University Library of Munich, Germany, revised 2009.
    3. Adeniji, Sesan, 2013. "Investigating the Relationship between Currency Substitution, Exchange Rate and Inflation in Nigeria: An Autoregressive Distributed Lag (ARDL) Approach," MPRA Paper 52551, University Library of Munich, Germany, revised 28 Dec 2013.
    4. Yinusa, D. Olalekan, 2008. "Exchange Rate Volatility, Currency Substitution and Monetary Policy in Nigeria," MPRA Paper 16255, University Library of Munich, Germany.
    5. Lula G. Mengesha & Mark J. Holmes, 2013. "Does Dollarization Alleviate Or Aggravate Exchange Rate Volatility?," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 99-118, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:jespps:v:35:y:2008:i:1:p:69-93. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emerald Support (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.