We study the effects of an anticipated dollarization, announced today but planned to be implemented at some future date, in a simple open-economy model. Motivated by the profile of countries considering dollarization we make the following assumptions. First, the government faces a scarcity of dollars to pledge for the future conversion of domestic currency. Second, without dollarization monetary policy finances a deficit via seignorage. We focus on the pre-dollarization period. Our results are as follows. First, the announcement leads to a discrete devaluation on impact. Second, after this jump the devaluation rate also rises relative to the no dollarization benchmark. Finally, the devaluation and inflation rate may rises over time.
Authors
- Acknowledgements and Disclosures
- We thank detailed comments on an earlier draft by Juan Pablo Nicolini. We also benefited from discussions with Guillermo Calvo, Domingo Cavallo, Pablo Guidotti, Luciano Laspina, Guillermo Mondino, Alejandro Rodriguez, Martin Uribe and several webinar participants. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w31763
- Published in
- United States of America
