Welfare Gains from Optimal Policy in a Partially Dollarized Economy

Carlos Machicado Salas

No 10/2006, Development Research Working Paper Series from Institute for Advanced Development Studies

Abstract: This paper evaluates welfare under optimal monetary and fiscal policy in a dynamic stochastic model of currency substitution and capital. It shows that in a partially dollarized economy, the main optimal policy results, i.e. the Friedman Rule and the zero capital tax, hold. Welfare implications of these optimal policies are computed for the Bolivian economy using a second-order approximation technique. The primary conclusions are that the welfare gains under optimal monetary policy are negligible. The welfare gains when optimal fiscal policy is considered alone or in conjunction with optimal monetary policy are sizable and come from the increase in real variables and also by the increase in real balances in local currency. Thus, welfare gains are negatively related to dollarization.

Keywords: Dollarization; Optimal Fiscal and Monetary Policy; Second-order approximation technique. (search for similar items in EconPapers)
JEL-codes: E61 E63 F31 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2006-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.inesad.edu.bo/pdf/wp10_2006.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:adv:wpaper:200610

Access Statistics for this paper

More papers in Development Research Working Paper Series from Institute for Advanced Development Studies Contact information at EDIRC.
Bibliographic data for series maintained by Lykke Andersen ().