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The Choice of Exchange Rate Regime and Monetary Target in Highly Dollarized Economies

Author

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  • Mr. Eduardo Borensztein
  • Mr. Andrew Berg

Abstract

We examine the implications of high degrees of dollarization for the choice of exchange rate regime and the information content of various monetary aggregates in developing countries. We conclude that a high degree of currency substitution argues for a more fixed exchange rate regime, while asset substitution may imply that either more rigid or more flexible regimes may be appropriate. We also ask whether the most informative monetary aggregates include dollar assets. Based on an analysis of five countries, we conclude inter alia that broader aggregates that include dollar assets perform better than those that do not.

Suggested Citation

  • Mr. Eduardo Borensztein & Mr. Andrew Berg, 2000. "The Choice of Exchange Rate Regime and Monetary Target in Highly Dollarized Economies," IMF Working Papers 2000/029, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2000/029
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    Keywords

    WP; currency; exchange rate; monetary aggregate; Dollarization; currency substitution; exchange rates; financial programming; money demand; rate of exchange rate depreciation; inflation equation; dollar currency; Granger cause inflation; foreign currency assets; money targeting; exchange rate volatility; form inflation equation; misaligned exchange rate; currency holding; aggregates granger cause inflation; money aggregate; Currencies; Monetary aggregates; Exchange rate arrangements; Demand for money;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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