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Optimal Exchange Rate Stabilization in a Dollarized Economy with Inflation Targets

  • Nicoletta Batini

    (International Monetary Fund)

  • Paul Levine

    (University of Surrey)

  • Joseph Pearlman

    (London Metropolitan University)

We build a small open-economy model with partial dollarization–households hold wealth in domestic currency and a foreign currency as in Felices and Tuesta (2006). The degree of dollarization is endogenous to the extent of exchange rate stabilization by the central bank. We identify the optimal monetary policy response under com-mitment and discretion and assess the optimal degree of exchange rate stabilization inthis set up, drawing policy implications for countries that target inflation in economies of this kind.

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Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2008-004.

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Date of creation: Feb 2008
Date of revision:
Handle: RePEc:rbp:wpaper:2008-004
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  1. Nicoletta Batini & Stephen P. Millard & Richard Harrison, 2000. "Monetary Policy Rules For An Open Economy," Computing in Economics and Finance 2000 361, Society for Computational Economics.
  2. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  3. V.V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1996. "Expectations, traps and discretion," Working Papers in Applied Economic Theory 96-04, Federal Reserve Bank of San Francisco.
  4. Nicoletta Batini & Paul Levine & Joseph Pearlman, 2004. "Indeterminacy with Inflation-Forecast-Based Rules in a Two-Bloc Model," School of Economics Discussion Papers 0204, School of Economics, University of Surrey.
  5. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  6. repec:tpr:qjecon:v:100:y:1985:i:4:p:1169-89 is not listed on IDEAS
  7. Nicoletta Batini & Joe Pearlman, 2002. "Too Much Too Soon: Instability and Indeterminacy with Forward-Looking Rules," Computing in Economics and Finance 2002 182, Society for Computational Economics.
  8. Currie,David & Levine,Paul, 1993. "Rules, Reputation and Macroeconomic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521441964.
  9. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, vol. 90(2), pages 100-104, May.
  10. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Addicted to Dollars," NBER Working Papers 10015, National Bureau of Economic Research, Inc.
    • Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Addicted to Dollars," CEMA Working Papers 594, China Economics and Management Academy, Central University of Finance and Economics.
  11. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  12. Reinhart, Carmen & Calvo, Guillermo, 2001. "Reflections on Dollarization," MPRA Paper 8206, University Library of Munich, Germany.
  13. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
  14. Benigno, Gianluca & Benigno, Pierpaolo, 2002. "Implementing Monetary Cooperation Through Inflation Targeting," CEPR Discussion Papers 3226, C.E.P.R. Discussion Papers.
  15. Benigno, Gianluca & Benigno, Pierpaolo, 2008. "Exchange rate determination under interest rate rules," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 971-993, October.
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