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On the Benefits of Dollarization when Stabilization Policy is not Credible and Financial Markets are Imperfect

  • Enrique G. Mendoza

This paper examines two potential benefits that emerging economies may derive from dollarization. First, dollarization may eliminate distortions induced by the lack of credibility of monetary policy. Second, dollarization may weaken financial frictions that result in endogenous credit constraints. The analysis is based on numerical simulations of a two-sector dynamic, stochastic general equilibrium model calibrated to Mexican data. The results indicate that policy uncertainty and credit constraints are very costly distortions. The mean welfare gains of eliminating policy uncertainty range between 6.4 and 9 percent of the trend level of consumption per capita. The mean welfare gain of weakening credit frictions is about 4.6 percent.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7824.

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Date of creation: Aug 2000
Date of revision:
Publication status: published as Mendoza, Enrique G. "The Benefits Of Dollarization When Stabilization Policy Lacks Credibility And Financial Markets Are Imperfect," Journal of Money, Credit and Banking, 2001, v33(2,May), Part 2, 440-474.
Handle: RePEc:nbr:nberwo:7824
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