Dollarization, Monetary Policy, and the Pass-Through

November 1, 2002

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Format: Chicago

Alain Ize, and Eric Parrado. Dollarization, Monetary Policy, and the Pass-Through, (USA: International Monetary Fund, 2002) accessed November 9, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper explores how real dollarization (dollar indexing of wages), financial dollarization (dollar denomination of financial contracts), and monetary policy interact in a general equilibrium, new open-economy macroeconomics model with real shocks. Real dollarization is avoided as long as the home monetary authorities conduct monetary policy optimally (maximize local welfare). Suboptimal monetary policies are more likely to induce real dollarization when the correlation between domestic and external shocks is high, since in this case the (presumably optimal) foreign monetary policy guarantees a better level of protection against macroeconomic uncertainty. While real dollarization contributes to financial dollarization, important asymmetries between the two were found.

Subject: Currencies, Dollarization, Exchange rates, Foreign exchange, Labor, Monetary policy, Money, Real exchange rates, Real wages

Keywords: Currencies, Dollarization, Dollarization curve, Dollarization dynamics, Dollarization trap, Exchange rate, Exchange rates, Financial dollarization, Global, Monetary management, Monetary policy, Optimal monetary policy, Price level, Real dollarization, Real exchange rates, Real wages, Small open economy, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2002/188
Stock No:

WPIEA1882002
ISBN:

9781451859577
ISSN:

1018-5941

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