Dollarization Dynamics / Tomás E. Caravello, Pedro Martinez-Bruera, Iván Werning.

Format:

Book

Author/Creator:

Caravello, Tomás E.

Contributor:

National Bureau of Economic Research.

Martinez-Bruera, Pedro.

Werning, Iván.

Series:

Working Paper Series (National Bureau of Economic Research) no. w31296.

NBER working paper series no. w31296

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

This study explores the consequences of dollarizing an economy with an initial dollar shortage. We show that the resulting transitional dynamics are tantamount to that of a "sudden stop": consumption of tradable goods fall, the real exchange rate depreciates abruptly by a discrete drop in domestic prices and wages followed by a gradual appreciation from positive inflation. With nominal rigidities the economy first falls into a recession. This is true even if all prices and wages are allowed to adjust flexibly on impact. The subsequent recovery in activity always "overshoots" the steady state: the non-tradable sector transitions from the initial recession to a boom, then asymptotes to its steady state.

Notes:

Print version record

June 2023.