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Stabilization policy and the costs of dollarization

  • Stephanie Schmitt-Grohe
  • Martin Uribe

This paper compares the welfare costs of business cycles in a dollarized economy to those arising in economies in which monetary policy takes the form of inflation targeting, money growth rate pegs, or devaluation rate rules. The analysis is conducted within an optimizing model of a small open economy with sticky prices. The model is calibrated to the Mexican economy and is driven by three external shocks: terms of trade, world interest rate, and import-price inflation. The welfare comparisons suggest that dollarization is the least successful of the monetary policies considered. Agents are willing to give up between 0.1 and 0.3 percent of their nonstochastic steady-state consumption to see a policy other than dollarization implemented.

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Article provided by Federal Reserve Bank of Cleveland in its journal Proceedings.

Volume (Year): (2001)
Issue (Month): ()
Pages: 482-517

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Handle: RePEc:fip:fedcpr:y:2001:p:482-517
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  4. Rebelo, Sérgio, 1995. "Real Effects of Exchange-Rate-Based Stabilization: An Analysis of Competing Theories," CEPR Discussion Papers 1220, C.E.P.R. Discussion Papers.
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  15. Marco Del Negro & Francesc Obiols-Homs, 2001. "Has monetary policy been so bad that it is better to get rid of it? The case of Mexico," Proceedings, Federal Reserve Bank of Cleveland, pages 404-439.
  16. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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  18. Jinill Kim & Sunghyun Henry Kim, 1999. "Inaccuracy of Loglinear Approximation in Welfare Calculations: the Case of International Risk Sharing," Computing in Economics and Finance 1999 251, Society for Computational Economics.
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