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Macroeconomic and Distributional Effects of Devaluation in a Dollarized Economy: A CGE Analysis for Bolivia

Author

Listed:
  • Rainer Schweickert

    () (IFW, Kiel)

  • Rainer Thiele

    () (IFW, Kiel)

  • Manfred Wiebelt

    () (IFW, Kiel)

Abstract

In this paper, a real-financial CGE model is employed for Bolivia to simulate the macroeconomic and distributional effects of exchange rate policy in a highly dollarized economy. Overall, dollarization appears to matter more through real than through financial-sector effects. The main macroeconomic result of the simulations is that the potential of nominal devaluation to smooth the adjustment path after a negative shock primarily depends on the absence of wage indexation. Only if nominal wages are constant in the short run, devaluation reduces unemployment and cushions the reduction of real GDP induced by the shock. Financial de-dollarization tends to be contractionary in Bolivia but different degrees of financial dollarization hardly change the real sector effects. As concerns distributional effects, nominal devaluation in no circumstance reduces the poverty effect of the external shock. Even the significant short-run macroeconomic expansion that occurs without wage indexation does not translate into significant poverty alleviation, given the offsetting effects of devaluation on real factor incomes, real interest incomes, and real transfers received by households.

Suggested Citation

  • Rainer Schweickert & Rainer Thiele & Manfred Wiebelt, 2005. "Macroeconomic and Distributional Effects of Devaluation in a Dollarized Economy: A CGE Analysis for Bolivia," Ibero America Institute for Econ. Research (IAI) Discussion Papers 120, Ibero-America Institute for Economic Research.
  • Handle: RePEc:got:iaidps:120
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    File URL: http://www2.vwl.wiso.uni-goettingen.de/ibero/working_paper_neu/DB120.pdf
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    References listed on IDEAS

    as
    1. Levy Yeyati, Eduardo & Sturzenegger, Federico & Reggio, Iliana, 2010. "On the endogeneity of exchange rate regimes," European Economic Review, Elsevier, pages 659-677.
    2. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, pages 379-408.
    3. De Nicolo, Gianni & Honohan, Patrick & Ize, Alain, 2003. "Dollarization of the banking system : good or bad?," Policy Research Working Paper Series 3116, The World Bank.
    4. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(4), pages 459-472, November.
    5. Agenor, Pierre-Richard & Izquierdo, Alejandro & Fofack, Hippolyte, 2003. "The integrated macroeconomic model for poverty analysis : a quantitative macroeconomic framework for the analysis of poverty reduction strategies," Policy Research Working Paper Series 3092, The World Bank.
    6. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, pages 1121-1150.
    7. Rainer Thiele & Daniel Piazolo, 2003. "A Social Accounting Matrix for Bolivia Featuring Formal and Informal Activities," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., pages 285-318.
    8. Lay, Jann & Thiele, Rainer & Wiebelt, Manfred, 2004. "Pro-poor growth in Bolivia: accounting for external shocks and policy reforms," Kiel Working Papers 1231, Kiel Institute for the World Economy (IfW).
    9. Klasen, Stephan, 2004. "Gender-Related Indicators of Well-Being," WIDER Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
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    Citations

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    Cited by:

    1. Tellería, Roberto & Ludeña, Carlos & Fernández, Soraya, 2011. "Policy alternatives and strategies for the Plurinational State of Bolivia following the end of trade preferences," Documentos de Proyectos 424, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    2. Tellería, Roberto & Ludeña, Carlos & Fernández, Soraya, 2011. "Policy alternatives and strategies for the Plurinational State of Bolivia following the end of trade preferences," Documentos de Proyectos 3922, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    3. Acharya, Sanjaya, 2010. "Potential impacts of the devaluation of Nepalese currency: A general equilibrium approach," Economic Systems, Elsevier, vol. 34(4), pages 413-436, December.

    More about this item

    Keywords

    Dollarization; Poverty; Computable General Equilibrium Model; Bolivia;

    JEL classification:

    • D3 - Microeconomics - - Distribution
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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