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Chronicle of a Dollarization Foretold: Inflation and Exchange Rates Dynamics

Author

Listed:
  • Tomás E. Caravello
  • Pedro Martinez-Bruera
  • Iván Werning

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.

Suggested Citation

  • Tomás E. Caravello & Pedro Martinez-Bruera & Iván Werning, 2023. "Chronicle of a Dollarization Foretold: Inflation and Exchange Rates Dynamics," NBER Working Papers 31763, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31763
    Note: EFG IFM ME
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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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