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Macroeconomic and Distributional Effects of Devaluation in a Dollarized Economy: A CGE Analysis for Bolivia

Author

Listed:
  • Rainer Schweickert

    (IFW, Kiel)

  • Rainer Thiele

    (IFW, Kiel)

  • Manfred Wiebelt

    (IFW, Kiel)

Abstract

In this paper, a real-financial CGE model is employed for Bolivia to simulate the macroeconomic and distributional effects of exchange rate policy in a highly dollarized economy. Overall, dollarization appears to matter more through real than through financial-sector effects. The main macroeconomic result of the simulations is that the potential of nominal devaluation to smooth the adjustment path after a negative shock primarily depends on the absence of wage indexation. Only if nominal wages are constant in the short run, devaluation reduces unemployment and cushions the reduction of real GDP induced by the shock. Financial de-dollarization tends to be contractionary in Bolivia but different degrees of financial dollarization hardly change the real sector effects. As concerns distributional effects, nominal devaluation in no circumstance reduces the poverty effect of the external shock. Even the significant short-run macroeconomic expansion that occurs without wage indexation does not translate into significant poverty alleviation, given the offsetting effects of devaluation on real factor incomes, real interest incomes, and real transfers received by households.

Suggested Citation

  • Rainer Schweickert & Rainer Thiele & Manfred Wiebelt, 2005. "Macroeconomic and Distributional Effects of Devaluation in a Dollarized Economy: A CGE Analysis for Bolivia," Ibero America Institute for Econ. Research (IAI) Discussion Papers 120, Ibero-America Institute for Economic Research.
    • Handle: RePEc:got:iaidps:120
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    References listed on IDEAS

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    Cited by:

    1. Tellería, Roberto & Fernández, Soraya & Ludeña, Carlos, 2011. "Policy alternatives and strategies for the Plurinational State of Bolivia following the end of trade preferences," Documentos de Proyectos 3922, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    2. Acharya, Sanjaya, 2010. "Potential impacts of the devaluation of Nepalese currency: A general equilibrium approach," Economic Systems, Elsevier, vol. 34(4), pages 413-436, December.

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    More about this item

    Keywords

    Dollarization; Poverty; Computable General Equilibrium Model; Bolivia;
    All these keywords.

    JEL classification:

    • D3 - Microeconomics - - Distribution
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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