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Exchange rate policy in a dollarized economy: A CGE analysis for Bolivia

Author

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  • Schweickert, Rainer
  • Thiele, Rainer
  • Wiebelt, Manfred

Abstract

In this paper, a real-financial CGE model is employed for Bolivia to simulate the macroeconomic and distributional effects of exchange rate policy in a highly dollarized economy. Overall, dollarization appears to matter more through real than through financial-sector effects. The main macroeconomic result of the simulations is that the potential of nominal devaluation to smooth the adjustment path after a negative shock primarily depends on the absence of wage indexation. Only if nominal wages are constant in the short run, devaluation reduces unemployment and cushions the reduction of real GDP induced by the shock. Financial de-dollarization tends to be contractionary in Bolivia but different degrees of financial dollarization hardly change the real sector effects. As concerns distributional effects, nominal devaluation in no circumstance reduces the poverty effect of the external shock. Even the significant short-run macroeconomic expansion that occurs without wage indexation does not translate into significant poverty alleviation, which is due to the fact that the real value of transfers received by households decreases in this case.

Suggested Citation

  • Schweickert, Rainer & Thiele, Rainer & Wiebelt, Manfred, 2005. "Exchange rate policy in a dollarized economy: A CGE analysis for Bolivia," Kiel Working Papers 1255, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1255
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    References listed on IDEAS

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    5. Lay, Jann & Thiele, Rainer & Wiebelt, Manfred, 2004. "Pro-poor growth in Bolivia: accounting for external shocks and policy reforms," Kiel Working Papers 1231, Kiel Institute for the World Economy (IfW Kiel).
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    Cited by:

    1. Stephan Klasen, 2006. "Macroeconomic Policy and Pro-Poor Growth in Bolivia," Ibero America Institute for Econ. Research (IAI) Discussion Papers 143, Ibero-America Institute for Economic Research.

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    More about this item

    Keywords

    Poverty; Computable General Equilibrium Model; Bolivia; Dollarization;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D3 - Microeconomics - - Distribution

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