This paper contrasts the volatility of the main macroeconomic variables of a small open economy in two environments: an official dollarization (OD) scheme and a flexible exchange regime (FER). A simple DSGE model calibrated for the Chilean economy is used as a laboratory to study the implications of these regimes on the standard deviations of key variables. Welfare implications are also analyzed for a central bank that it is concerned with output and inflation volatility. Our findings show that OD results in: higher real volatility due to the absence of ountercyclical monetary policy; lower inflation volatility because of a less volatile foreign interest rate; and, from a welfare perspective, OD is dominated by a FER when the central bank weighs considerably the deviations of inflation and output from the steady state. Also, OD implies higher fiscal deficit volatility as a consequence of higher tax revenue volatility, and a higher reaction to terms-of-trade shocks.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Alberto Alesina & Robert J. Barro, 2001.
"Dollarization,"
American Economic Review,
American Economic Association, vol. 91(2), pages 381-385, May.
[Downloadable!] (restricted)
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)