TY  - JOUR
AU  - Mendoza,Enrique G.
TI  - On the Benefits of Dollarization when Stabilization Policy is not Credible and Financial Markets are Imperfect
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7824
PY  - 2000
Y2  - August 2000
UR  - http://www.nber.org/papers/w7824
L1  - http://www.nber.org/papers/w7824.pdf
N1  - Author contact info:
Enrique G. Mendoza
Department of Economics
University of Pennsylvania
3718 Locust Walk
Philadelphia, PA 19104
Tel: 215-898-7701
E-Mail: egme@sas.upenn.edu
AB  - This paper examines two potential benefits that emerging economies may derive from dollarization.  First, dollarization may eliminate distortions induced by the lack of credibility of monetary policy.  Second, dollarization may weaken financial frictions that result in endogenous credit constraints.  The analysis is based on numerical simulations of a two-sector dynamic, stochastic general equilibrium model calibrated to Mexican data.  The results indicate that policy uncertainty and credit constraints are very costly distortions.  The mean welfare gains of eliminating policy uncertainty range between 6.4 and 9 percent of the trend level of consumption per capita.  The mean welfare gain of weakening credit frictions is about 4.6 percent.
ER  -