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Stabilization Policy and the Costs of Dollarization

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  • Schmitt-Grohe, Stephanie
  • Uribe, Martin

Abstract

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.

Suggested Citation

  • Schmitt-Grohe, Stephanie & Uribe, Martin, 2001. "Stabilization Policy and the Costs of Dollarization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 482-509, May.
  • Handle: RePEc:mcb:jmoncb:v:33:y:2001:i:2:p:482-509
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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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