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An Estimated Stochastic General Equilibrium Model with Partial Dollarization: A Bayesian Approach

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  • Paul Castillo
  • Carlos Montoro
  • Vicente Tuesta

    ()

Abstract

In this paper, we develop and estimate a dynamic stochastic, general-equilibrium New Keynesian model with partial dollarization. Bayesian techniques and Peruvian data are used to evaluate two forms of dollarization: currency substitution (CS) and price dollarization (PD). The empirical results are as follow: first, it is noted that the two forms of partial dollarization are important in explaining the significance of the Peruvian data. Second, models with both forms of dollarization dominate models without dollarization. Third, a counterfactual exercise shows that by eliminating both forms of partial dollarization, the response of both output and consumption to a monetary policy shock doubles, making the interest rate channel of monetary policy more effective. Fourth, based on the variance decomposition of the preferred model (with CS and PD), it is found that demand type shocks explain almost all the fluctuation in CPI inflation, the monetary shock being the most important (39%). Remarkably, foreign disturbances account for 34% of the output fluctuations. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Paul Castillo & Carlos Montoro & Vicente Tuesta, 2013. "An Estimated Stochastic General Equilibrium Model with Partial Dollarization: A Bayesian Approach," Open Economies Review, Springer, vol. 24(2), pages 217-265, April.
  • Handle: RePEc:kap:openec:v:24:y:2013:i:2:p:217-265
    DOI: 10.1007/s11079-012-9239-3
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    Keywords

    Bayesian estimation; DSGE; Partial dollarization; F31; F32; F41; C11;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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