Dollarization as a signaling device

Krzysztof Makarski

Bank i Kredyt, 2014, vol. 45, issue 1, 17-36

Abstract: The objective of this paper is to point out that dollarization may be used as a signaling device. To this end, we introduce into a standard monetary policy model two types of governments: good and bad. Information is asymmetric, the government type is uncertain and the policy of the bad government is suboptimal. This uncertainty does not allow the good government to achieve the first best outcome even though it conducts optimal policy. Since, the bad government would never dollarize, the good government by dollarizing reduces uncertainty about the type of government and achieves the first best allocation. Here, unlike in models emphasizing the time inconsistency motive for dollarization, it does not change the actual policy. Thus, dollarization plays the role of a signaling device rather than a commitment device.

Keywords: dollarization; monetary policy; signaling (search for similar items in EconPapers)
JEL-codes: E32 E42 E44 E52 F40 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://bankikredyt.nbp.pl/content/2014/01/bik_01_2014_02_art.pdf (application/pdf)

Related works:
Working Paper: Dollarization as a Signaling Device (2009)
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:nbp:nbpbik:v:45:y:2014:i:1:p:17-36

Access Statistics for this article

More articles in Bank i Kredyt from Narodowy Bank Polski Contact information at EDIRC.
Bibliographic data for series maintained by Wojciech Burjanek ().