Working Paper: NBER ID: w31763
Authors: Toms E. Caravello; Pedro Martinez-Bruera; Ivn 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.
Keywords: Dollarization; Inflation; Exchange Rates
JEL Codes: E0; F3; F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| announcement of dollarization (F33) | immediate devaluation (F31) |
| anticipation of dollarization (F31) | inflation rate (E31) |
| announcement of dollarization (F33) | inflation rate (E31) |
| initial announcement of dollarization (F33) | sustained upward trajectory of devaluation and inflation rates (E31) |