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Floating, Official Dollarization, and Macroeconomic Volatility:An Analysis for the Chilean Economy

  • Roberto Duncan

This paper contrasts the volatility of the main macroeconomic variables of a small open economy in two environments: an official dollarization (OD) scheme and a flexible exchange regime (FER). A simple DSGE model calibrated for the Chilean economy is used as a laboratory to study the implications of these regimes on the standard deviations of key variables. Welfare implications are also analyzed for a central bank that it is concerned with output and inflation volatility. Our findings show that OD results in: higher real volatility due to the absence of ountercyclical monetary policy; lower inflation volatility because of a less volatile foreign interest rate; and, from a welfare perspective, OD is dominated by a FER when the central bank weighs considerably the deviations of inflation and output from the steady state. Also, OD implies higher fiscal deficit volatility as a consequence of higher tax revenue volatility, and a higher reaction to terms-of-trade shocks.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 249.

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Date of creation: Dec 2003
Date of revision:
Handle: RePEc:chb:bcchwp:249
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  1. Bastourre, Diego & Carrera, Jorge & Féliz, Mariano & Panigo, Demian, 2003. "Dollarization and real volatility," CEPREMAP Working Papers (Couverture Orange) 0311, CEPREMAP.
  2. Raphael Bergoeing & Patrick J. Kehoe & Timothy J. Kehoe & Raimundo Soto, 2002. "A Decade Lost and Found: Mexico and Chile in the 1980s," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 166-205, January.
  3. Cooley, Thomas F & Quadrini, Vincenzo, 2001. "The Cost of Losing Monetary Independence: The Case of Mexico," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 370-97, May.
  4. Fabio Ghironi & Alessandro Rebucci, 2000. "Monetary Rules for Emerging Market Economies," Boston College Working Papers in Economics 476, Boston College Department of Economics, revised 13 Aug 2001.
  5. Michael W. Klein, 2002. "Dollarization and Trade," NBER Working Papers 8879, National Bureau of Economic Research, Inc.
  6. Raphael Bergoeing & Raimundo Soto, 2005. "Testing Real Business Cycle Models in a Emerging Economy," Central Banking, Analysis, and Economic Policies Book Series, in: Rómulo A. Chumacero & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), General Equilibrium Models for the Chilean Economy, edition 1, volume 9, chapter 7, pages 221-260 Central Bank of Chile.
  7. Stephanie Schmitt-Grohe & Martin Uribe, 2000. "Stabilization Policy and the Costs of Dollarization," Departmental Working Papers 200006, Rutgers University, Department of Economics.
  8. Drew, Aaron & Hall, Viv B. & McDermott, C. John & Clair, Robert St., 2004. "Would adopting the Australian dollar provide superior monetary policy in New Zealand?," Economic Modelling, Elsevier, vol. 21(6), pages 949-964, December.
  9. Edwards, Sebastian, 2001. "Dollarization: Myths and realities," Journal of Policy Modeling, Elsevier, vol. 23(3), pages 249-265, April.
  10. Hochreiter, Eduard & Schmidt-Hebbel, Klaus & Winckler, Georg, 2002. "Monetary union: European lessons, Latin American prospects," The North American Journal of Economics and Finance, Elsevier, vol. 13(3), pages 297-321, December.
  11. 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.
  12. 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.
  13. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 573-601, June.
  14. repec:cto:journl:v:20:y:2000:i:2:p:179-213 is not listed on IDEAS
  15. Roberto Duncan, 2002. "How Well Does a Monetary Dynamic Equilibrium Model Account for Chilean Data?," Working Papers Central Bank of Chile 190, Central Bank of Chile.
  16. Sebastian Edwards & I. Igal Magendzo, 2001. "Dollarization, Inflation and Growth," NBER Working Papers 8671, National Bureau of Economic Research, Inc.
  17. Zeljko Bogetic, 2005. "Official Dollarization: Current Experiences and Issues, Cato Journal, Vol. 20, No. 2 (Fall 2000), 179-213," International Finance 0510006, EconWPA.
  18. Roberto Chang & Andres Velasco, 2002. "Dollarization: Analytical Issues," NBER Working Papers 8838, National Bureau of Economic Research, Inc.
  19. Sebastian Edwards, 2001. "Dollarization and Economic Performance: An Empirical Investigation," NBER Working Papers 8274, National Bureau of Economic Research, Inc.
  20. Pereyra, Carlos & Quispe, Zenón, 2002. "¿Es conveniente una dolarización total en una economía parcialmente dolarizada?," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 8, pages 25-47.
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