Optimal Exchange Rate Stabilization in a Dollarized Economy with Inflation Targets

Nicoletta Batini, Paul Levine () and Joseph Pearlman

No 2008-004, Working Papers from Banco Central de Reserva del Perú

Abstract: We build a small open-economy model with partial dollarization–households hold wealth in domestic currency and a foreign currency as in Felices and Tuesta (2006). The degree of dollarization is endogenous to the extent of exchange rate stabilization by the central bank. We identify the optimal monetary policy response under com-mitment and discretion and assess the optimal degree of exchange rate stabilization inthis set up, drawing policy implications for countries that target inflation in economies of this kind.

Keywords: dollarized economies; optimal monetary policy; managed exchange rates; inflation-forecast-based rules (search for similar items in EconPapers)
JEL-codes: E37 E52 E58 (search for similar items in EconPapers)
Date: 2008-02
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (1)

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Working Paper: Optimal Exchange Rate Stabilization in a Dollarized Economy with Inflation Targets (2006)
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