Working Paper: NBER ID: w7824
Authors: Enrique G. Mendoza
Abstract: This paper examines two potential benefits that emerging economies may derive from dollarization. First, dollarization may eliminate distortions induced by the lack of credibility of monetary policy. Second, dollarization may weaken financial frictions that result in endogenous credit constraints. The analysis is based on numerical simulations of a two-sector dynamic, stochastic general equilibrium model calibrated to Mexican data. The results indicate that policy uncertainty and credit constraints are very costly distortions. The mean welfare gains of eliminating policy uncertainty range between 6.4 and 9 percent of the trend level of consumption per capita. The mean welfare gain of weakening credit frictions is about 4.6 percent.
Keywords: No keywords provided
JEL Codes: F32; F33; F34; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Dollarization (F31) | Elimination of policy uncertainty (G18) |
| Lack of credibility in monetary policy (E49) | Economic distortions (H31) |
| Dollarization (F31) | Reduction of financial frictions (G19) |
| Dollarization (F31) | Enhanced credit availability (E51) |
| Reduction of financial frictions (G19) | Economic activity (E29) |
| Elimination of policy uncertainty (G18) | Mean welfare gains (D69) |
| Weakening credit frictions (F65) | Mean welfare gains (D69) |