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Optimal Exchange Rate Stabilization in a Dollarized Economy with Inflation Targets

Author

Listed:
  • Nicoletta Batini

    (International Monetary Fund)

  • Joseph Pearlman

    (London Metropolitan University)

  • Paul Levine

    (University of Surrey)

Abstract

We build a small open-economy model with partial financial dollarization--households hold wealth in domestic currency and a foreign currency; firms also have a balance sheet mismatch as in Gertler, Gilchrist and Natalucci (2001). The degree of dollarization is endogenous to the extent of exchange rate stabilization by the central bank. We identify the optimal monetary policy response and assess the optimal degree of exchange rate stabilization in this set up, drawing policy implications for countries that target inflation in economies of this kind

Suggested Citation

  • Nicoletta Batini & Joseph Pearlman & Paul Levine, 2006. "Optimal Exchange Rate Stabilization in a Dollarized Economy with Inflation Targets," Computing in Economics and Finance 2006 148, Society for Computational Economics.
    • Handle: RePEc:sce:scecfa:148
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    Cited by:

    1. Paul Castillo & Carlos Montoro & Vicente Tuesta, 2013. "An Estimated Stochastic General Equilibrium Model with Partial Dollarization: A Bayesian Approach," Open Economies Review, Springer, vol. 24(2), pages 217-265, April.
    2. Salas, Jorge, 2011. "Estimación bayesiana de unmodelo de pequeña economía abierta con dolarización parcial," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 22, pages 41-62.
    3. Carranza, Luis & Galdon-Sanchez, Jose E. & Gomez-Biscarri, Javier, 2011. "The relationship between investment and large exchange rate depreciations in dollarized economies," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1265-1279.
    4. Guillermo Felices & Vicente Tuesta, 2013. "Monetary policy in a dual currency environment," Applied Economics, Taylor & Francis Journals, vol. 45(34), pages 4739-4753, December.
    5. Seyed Kamal Sadeghi & Majid Feshari & Maryam Barzegar Marvasti & Zhila Ghanbari, 2015. "Exchange Rate Pass-Through and Inflation in Dollarized Economies: Evidence from the Middle Eastern and North African Countries," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 19(2), pages 139-147, Spring.
    6. Javier García-Cicco, 2010. "Estimating Models for Monetary Policy Analysis in Emerging Countries," Working Papers Central Bank of Chile 561, Central Bank of Chile.
    7. N. R. Ramírez-Rondán, 2019. "Balance sheet and currency mismatch: evidence for Peruvian firms," Empirical Economics, Springer, vol. 57(2), pages 449-473, August.
    8. Carranza, Luis & Galdon-Sanchez, Jose E. & Gomez-Biscarri, Javier, 2009. "Exchange rate and inflation dynamics in dollarized economies," Journal of Development Economics, Elsevier, vol. 89(1), pages 98-108, May.

    More about this item

    Keywords

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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