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Dollarization Dynamics

Author

Listed:
  • Tomás E. Caravello
  • Pedro Martinez-Bruera
  • Iván Werning

Abstract

This study explores the consequences of dollarizing an economy with an initial dollar shortage. We show that the resulting transitional dynamics are tantamount to that of a “sudden stop”: consumption of tradable goods fall, the real exchange rate depreciates abruptly by a discrete drop in domestic prices and wages followed by a gradual appreciation from positive inflation. With nominal rigidities the economy first falls into a recession. This is true even if all prices and wages are allowed to adjust flexibly on impact. The subsequent recovery in activity always “overshoots” the steady state: the non-tradable sector transitions from the initial recession to a boom, then asymptotes to its steady state.

Suggested Citation

  • Tomás E. Caravello & Pedro Martinez-Bruera & Iván Werning, 2023. "Dollarization Dynamics," NBER Working Papers 31296, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31296
    Note: EFG IFM ME
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    Cited by:

    1. Emilio Ocampo & Nicolás Cachanosky, 2023. "Dollarization dynamics: A comment," CEMA Working Papers: Serie Documentos de Trabajo. 855, Universidad del CEMA.

    More about this item

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • F30 - International Economics - - International Finance - - - General

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