Dollarization Dynamics Article Swipe
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Tomás Caravello
,
Pedro Martinez-Bruera
,
Iván Werning
·
YOU?
·
· 2023
· Open Access
·
· DOI: https://doi.org/10.3386/w31296
· OA: W4379380641
YOU?
·
· 2023
· Open Access
·
· DOI: https://doi.org/10.3386/w31296
· OA: W4379380641
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.
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