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Dollarization as a signaling device

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  • Krzysztof Makarski

    () (Narodowy Bank Polski
    Warsaw School of Economics)

Abstract

The objective of this paper is to point out that dollarization may be used as a signaling device. To this end, we introduce into a standard monetary policy model two types of governments: good and bad. Information is asymmetric, the government type is uncertain and the policy of the bad government is suboptimal. This uncertainty does not allow the good government to achieve the first best outcome even though it conducts optimal policy. Since, the bad government would never dollarize, the good government by dollarizing reduces uncertainty about the type of government and achieves the first best allocation. Here, unlike in models emphasizing the time inconsistency motive for dollarization, it does not change the actual policy. Thus, dollarization plays the role of a signaling device rather than a commitment device.

Suggested Citation

  • Krzysztof Makarski, 2014. "Dollarization as a signaling device," Bank i Kredyt, Narodowy Bank Polski, vol. 45(1), pages 17-36.
  • Handle: RePEc:nbp:nbpbik:v:45:y:2014:i:1:p:17-36
    as

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    References listed on IDEAS

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    1. Enrique G. Mendoza, 2001. "The benefits of dollarization when stabilization policy lacks credibility and financial markets are imperfect," Proceedings, Federal Reserve Bank of Cleveland, pages 440-481.
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    More about this item

    Keywords

    dollarization; monetary policy; signaling;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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