Chronicle of a Dollarization Foretold: Inflation and Exchange Rates Dynamics

Tomás E. Caravello, Pedro Martinez-Bruera and Iván Werning

No 31763, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the effects of an anticipated dollarization, announced today but planned to be implemented at some future date, in a simple open-economy model. Motivated by the profile of countries considering dollarization we make the following assumptions. First, the government faces a scarcity of dollars to pledge for the future conversion of domestic currency. Second, without dollarization monetary policy finances a deficit via seignorage. We focus on the pre-dollarization period. Our results are as follows. First, the announcement leads to a discrete devaluation on impact. Second, after this jump the devaluation rate also rises relative to the no dollarization benchmark. Finally, the devaluation and inflation rate may rises over time.

JEL-codes: E0 F3 F31 F33 (search for similar items in EconPapers)
Date: 2023-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mon and nep-opm
Note: EFG IFM ME
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