Fix vs. Float: Evaluating the Transition to a Sustainable Equilibrium in Bolivia

By Andres Gonzalez, Etibar Jafarov, Diego Rodriguez Guzman, Chris Walker

February 25, 2022

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Format: Chicago

Andres Gonzalez, Etibar Jafarov, Diego Rodriguez Guzman, and Chris Walker. Fix vs. Float: Evaluating the Transition to a Sustainable Equilibrium in Bolivia, (USA: International Monetary Fund, 2022) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Bolivia has achieved noteworthy success over the past 15 years in raising incomes, reducing poverty, and maintaining macroeconomic stability by deploying commodity revenues to finance transfers, public investment, and state-led development, using an exchange rate peg as a policy anchor. However, with the end of the commodity boom in 2014, fiscal deficits have grown and reserves have fallen. One route to restoring long-run sustainability would be to combine fiscal consolidation with a switch to a floating exchange rate. However, a preference for maintaining the peg could be accommodated with adjustments elsewhere in the policy framework. Employing a detailed dynamic stochastic general equilibrium model of the Bolivian economy, this study assesses the long-run sustainability and relative benefits of alternative policy combinations, and calculates optimal adjustment paths for the transition from the present situation to the steady state. It concludes that continued adherence to a fixed-rate regime, while not optimal, is feasible, if supported by a larger fiscal effort.

Subject: Conventional peg, Exchange rate arrangements, Exchange rate flexibility, Fiscal policy, Floating exchange rates, Foreign exchange, Government debt management, Public financial management (PFM)

Keywords: Bolivia, Commodity revenue, Conventional peg, Exchange rate arrangements, Exchange rate flexibility, Fixed exchange rate, Floating exchange rates, Government debt management, Inflation target, Linear time iteration, Long-run sustainability, Open economy, Speculative attack, Time consistency., Transition path, Utility function

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/043
Stock No:

WPIEA2022043
ISBN:

9798400203053
ISSN:

1018-5941

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