IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Dollarization as a Signaling Device

The objective of this paper is to point out that dollarization, apart from being a commitment device, may also be used as a signaling device if there is uncertainty about the government’s intentions. To this end, we modify the standard approach to modeling monetary policy by introducing two types of government: good and bad. It is assumed that the good government conducts optimal policy while the bad government prefers to finance higher (than optimal) government expenditure by printing money. People do not observe the type of government, however they know the probability distribution over the two government types. Due to this uncertainty, the good government cannot achieve the first best even if it conducts optimal monetary policy. Hence, the good government has an incentive to dollarize, while the bad governments avoids this step. As a result, we obtain a separating equilibrium where dollarization is a perfect signal of the government type.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nbp.pl/publikacje/materialy_i_studia/63_en.pdf
Download Restriction: no

Paper provided by Narodowy Bank Polski, Economic Research Department in its series NBP Working Papers with number 63.

as
in new window

Length: 25
Date of creation: 2009
Handle: RePEc:nbp:nbpmis:63
Contact details of provider: Postal:
00-919 Warszawa ul. Świętokrzyska 11/21

Phone: (0-22) 653 10 00
Fax: (0-22) 620 85 18
Web page: http://www.nbp.pl/Homen.aspx?f=/en/publikacje/materialy_i_studia/informacja_en.html

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.:

as
in new window


  1. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
  2. Alberto Alesina & Robert J. Barro, 2002. "Currency Unions," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 409-436.
  3. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation Traps and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 715-741.
  4. Arellano, Cristina & Heathcote, Jonathan, 2010. "Dollarization and financial integration," Journal of Economic Theory, Elsevier, vol. 145(3), pages 944-973, May.
  5. Robert Barro & Silvana Tenreyro, 2007. "Economic Effects Of Currency Unions," Economic Inquiry, Western Economic Association International, vol. 45(1), pages 1-23, 01.
  6. Calvo, Guillermo A, 2001. "Capital Markets and the Exchange Rate with Special Reference to the Dollarization Debate in Latin America," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 312-334, May.
  7. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  8. 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.
  9. Phelan, Christopher, 2006. "Public trust and government betrayal," Journal of Economic Theory, Elsevier, vol. 130(1), pages 27-43, September.
  10. Click, Reid W, 1998. "Seigniorage in a Cross-Section of Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(2), pages 154-171, May.
  11. Christopher Phelan, 2001. "Public trust and government betrayal," Staff Report 283, Federal Reserve Bank of Minneapolis.
  12. 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 370-397, May.
  13. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-944, October.
  14. Russell W. Cooper & Hubert Kempf, 2001. "Dollarization and the conquest of hyperinflation in divided societies," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-12.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:nbp:nbpmis:63. 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: (Zbigniew Polański)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.