| Abstract: |
With a few exceptions, the advantages of dollarization have not
been discussed in a dynamic general equilibrium framework, especially
for partially dollarized economies that are supposed to be good candidates
to follow this kind of regime. After reviewing the arguments for and
against dollarization, this paper explores its implications on the
volatility of the main macroeconomic variables of an emerging small
open economy that faces terms-of-trade shocks. Dynamic equilibrium
models are used as laboratories to study these issues and contrast
two environments: a partially dollarized economy with flexible exchange
rate (calibrated for the Peruvian economy) and a fully dollarized
economy. Simulation exercises are performed to analyze in both cases
the volatility of key variables such as output, consumption, investment,
inflation rate, and fiscal deficit. The conclusions are that full
dollarization implies (1) higher real volatility, especially on output
and investment; (2) lower inflation volatility; (3) higher fiscal
deficit volatility; (4) higher output response to terms-of-trade shocks.
Consequently, in this context it is difficult to affirm that dollarization
reduces country risk. Finally, the paper points up the role of price
stickiness and countercyclical monetary policy in these findings.
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Banco Central de Chile