Kiel Working Papers, Kiel Institute for World Economics
No 1255:
Exchange Rate Policy in a Dollarized Economy: A CGE Analysis for Bolivia
Rainer Schweickert, Rainer Thiele and Manfred Wiebelt
Abstract: In this paper, a real-financial CGE model is employed for
Bolivia to simulate the macroeconomic and distributional effects of
exchange rate policy in a highly dollarized economy. Overall, dollarization
appears to matter more through real than through financial-sector effects.
The main macroeconomic result of the simulations is that the potential of
nominal devaluation to smooth the adjustment path after a negative shock
primarily depends on the absence of wage indexation. Only if nominal wages
are constant in the short run, devaluation reduces unemployment and
cushions the reduction of real GDP induced by the shock. Financial
de-dollarization tends to be contractionary in Bolivia but different
degrees of financial dollarization hardly change the real sector effects.
As concerns distributional effects, nominal devaluation in no circumstance
reduces the poverty effect of the external shock. Even the significant
short-run macroeconomic expansion that occurs without wage indexation does
not translate into significant poverty alleviation, which is due to the
fact that the real value of transfers received by households decreases in
this case.
Keywords: Dollarization, Poverty, Computable General Equilibrium Model, Bolivia; (follow links to similar papers)
JEL-Codes: O16,; D3,; C68; (follow links to similar papers)
40 pages, July 2005
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