Assessing the Impact of Real Shocks on Small Dollarized Economies
This paper compares the impact of real shocks on small open economies operating under two opposite corner solutions: flexible exchange rates and official dollarization. Using an asymmetric two-country model of policy coordination, we show that although a pegged regime like dollarization is an effective device to achieve price stability, small open economies might be better off under a flexible exchange rate regime than under dollarization following any symmetric or asymmetric real shock. We also consider the claim that many small economies have only a limited ability to use their own monetary policy effectively and contrast the dollarization regime with one in which a small open economy follows "fear of floating" practices. In this case, we observe that unless its size is trivial, maintaining monetary policy sovereignty--even if it is not fully exploited--allows the domestic economy to experience lower losses from stabilization in the face of symmetric shocks. Only when an economy is negligibly small, are the costs of stabilization following "fear of floating" practices the same as those under dollarization.
|Date of creation:|
|Date of revision:|
|Contact details of provider:|| Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom|
Phone: (0)1904 323776
Fax: (0)1904 323759
Web page: http://www.york.ac.uk/economics/
More information through EDIRC
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.:
- Barry Eichengreen & Fabio Ghironi, 2002. "Transatlantic Trade-Offs in the Age of Balanced Budgets and European Monetary Union," Open Economies Review, Springer, vol. 13(4), pages 381-411, October.
- Frederic S Mishkin & Miguel A Savastano, 2002. "Monetary Policy Strategies For Emerging Market Countries: Lessons From Latin America," Comparative Economic Studies, Palgrave Macmillan, vol. 44(2-3), pages 45-82, September.
- Martin, Philippe, 1997.
"The Exchange Rate Policy of the Euro: A Matter of Size?,"
CEPR Discussion Papers
1646, C.E.P.R. Discussion Papers.
- Martin, Philippe, 1998. "The Exchange Rate Policy of the Euro: A Matter of Size?," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 455-482, December.
- Philippe Martin, 1997. "The Exchange Rate Policy of the Euro: a Matter of Size?," Working Papers 1997-06, CEPII research center.
- Eichengreen, Barry, 2001. "What problems can dollarization solve?," Journal of Policy Modeling, Elsevier, vol. 23(3), pages 267-277, April.
- Guillermo A. Calvo & Carmen M. Reinhart, 2000.
"Fear of Floating,"
NBER Working Papers
7993, National Bureau of Economic Research, Inc.
- Guillermo A. Calvo, 2002. "On dollarization," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 10(2), pages 393-403, July.
- Roberto Chang, 2000. "Dollarization: a scorecard," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 1-12.
- Ghironi, Fabio & Giavazzi, Francesco, 1998. "Currency areas, international monetary regimes, and the employment-inflation tradeoff," Journal of International Economics, Elsevier, vol. 45(2), pages 259-296, August.
- Canzoneri, Matthew B & Gray, Jo Anna, 1985. "Monetary Policy Games and the Consequences of Non-cooperative Behavior," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 547-64, October.
- Martin, Philippe, 1995. "Free-riding, convergence and two-speed monetary unification in Europe," European Economic Review, Elsevier, vol. 39(7), pages 1345-1364, August.
- Dennis W. Jansen & Ming-Jang Weng, 1999. "A K% Money Growth Leadership Rule In An International Monetary Policy Game," Contemporary Economic Policy, Western Economic Association International, vol. 17(4), pages 506-516, October.
- Alberto Alesina & Robert J. Barro, 2001. "Dollarization," American Economic Review, American Economic Association, vol. 91(2), pages 381-385, May.
- Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787, December.
- Sebastian Edwards & I. Igal Magendzo, 2001. "Dollarization, Inflation and Growth," NBER Working Papers 8671, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:yor:yorken:05/27. 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: (Paul Hodgson)
If references are entirely missing, you can add them using this form.