Exploring the Implications of Official Dollarization on Macroeconomic Volatility
With a few exceptions, the advantages of dollarization have not been discussed in a dynamic general equilibrium framework, especially for partially dollarized economies that are supposed to be good candidates to follow this kind of regime. After reviewing the arguments for and against dollarization, this paper explores its implications on the volatility of the main macroeconomic variables of an emerging small open economy that faces terms-of-trade shocks. Dynamic equilibrium models are used as laboratories to study these issues and contrast two environments: a partially dollarized economy with flexible exchange rate (calibrated for the Peruvian economy) and a fully dollarized economy. Simulation exercises are performed to analyze in both cases the volatility of key variables such as output, consumption, investment, inflation rate, and fiscal deficit. The conclusions are that full dollarization implies (1) higher real volatility, especially on output and investment; (2) lower inflation volatility; (3) higher fiscal deficit volatility; (4) higher output response to terms-of-trade shocks. Consequently, in this context it is difficult to affirm that dollarization reduces country risk. Finally, the paper points up the role of price stickiness and countercyclical monetary policy in these findings.
|Date of creation:||Feb 2003|
|Contact details of provider:|| Postal: Casilla No967, Santiago|
Phone: (562) 670 2000
Fax: (562) 698 4847
Web page: http://www.bcentral.cl/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stephanie Schmitt-Grohe & Martin Uribe, 2001.
"Stabilization policy and the costs of dollarization,"
Federal Reserve Bank of Cleveland, pages 482-517.
- 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.
- Stephanie Schmitt-Grohe & Martin Uribe, 2000. "Stabilization Policy and the Costs of Dollarization," Departmental Working Papers 200006, Rutgers University, Department of Economics.
- Edwards, Sebastian, 2001. "Dollarization: Myths and realities," Journal of Policy Modeling, Elsevier, vol. 23(3), pages 249-265, April.
- Pesaran, H. Hashem & Shin, Yongcheol, 1998.
"Generalized impulse response analysis in linear multivariate models,"
Elsevier, vol. 58(1), pages 17-29, January.
- Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics 9710, Faculty of Economics, University of Cambridge.
- Bufman, G. & Leiderman, L., 1992. "Simulating an Optimizing Model of Currency Substitution," Papers 6-92, Tel Aviv - the Sackler Institute of Economic Studies.
- Enrique Mendoza, 2002.
"Why Should Emerging Economies Give Up National Currencies? A Case for Institutions Substitution,"
Research Department Publications
4309, Inter-American Development Bank, Research Department.
- Enrique G. Mendoza, 2002. "Why Should Emerging Economies Give up National Currencies: A Case for 'Institutions Substitution'," NBER Working Papers 8950, National Bureau of Economic Research, Inc.
- Enrique G. Mendoza, 2002. "Why Should Emerging Economies Give Up National Currencies?: A Case for "Institutions Substitution"," IDB Publications (Working Papers) 6822, Inter-American Development Bank.
- Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
- Sebastian Edwards & I. Igal Magendzo, 2001. "Dollarization, Inflation and Growth," NBER Working Papers 8671, National Bureau of Economic Research, Inc.
- Zeljko Bogetic, 2005. "Official Dollarization: Current Experiences and Issues, Cato Journal, Vol. 20, No. 2 (Fall 2000), 179-213," International Finance 0510006, EconWPA.
- Sebastian Edwards, 2001. "Dollarization and Economic Performance: An Empirical Investigation," NBER Working Papers 8274, National Bureau of Economic Research, Inc.
- Gale, Douglas M & Vives, Xavier, 2001.
"Dollarization, Bailouts and the Stability of the Banking System,"
CEPR Discussion Papers
2901, C.E.P.R. Discussion Papers.
- Douglas Gale & Xavier Vives, 2002. "Dollarization, Bailouts, and the Stability of the Banking System," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 467-502.
- Gale, Douglas & Vives, Xavier, 2002. "Dollarization, bailouts, and the stability of the banking system," HWWA Discussion Papers 185, Hamburg Institute of International Economics (HWWA).
- Douglas Gale & Xavier Vives, 2001. "Dollarization, bailouts, and the stability of the banking system," Proceedings 729, Federal Reserve Bank of Chicago.
- Michael W. Klein, 2002.
"Dollarization and Trade,"
NBER Working Papers
8879, National Bureau of Economic Research, Inc.
- repec:cto:journl:v:20:y:2000:i:2:p:179-213 is not listed on IDEAS
- Roberto Chang & Andres Velasco, 2002. "Dollarization: Analytical Issues," NBER Working Papers 8838, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:chb:bcchwp:200. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Sepulveda)
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.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.