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Dollarization, Monetary Policy, and the Pass-Through
Author:
Mr. Alain Ize
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and
Mr. Eric Parradonull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2002: Issue 188
Language:
English
Publication Date:
01 Nov 2002
DOI:
https://doi.org/10.5089/9781451859577.001
ISBN:
9781451859577
ISSN:
1018-5941
Pages:
34
Keywords:
WP; exchange rate; monetary policy; dollarization; exchange rates; optimal monetary policy; small open economy; real dollarization; dollarization trap; financial dollarization; monetary management; dollarization curve; price level; dollarization dynamics; Currencies; Real exchange rates; Real wages; Global
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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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2002: Issue 188