WP 2008-04: Optimal Exchange Rate Stabilization in a Dollarized Economy with Inflation Targets
WP 2008-04: Optimal Exchange Rate Stabilization in a Dollarized Economy with Inflation Targets
WP 2008-04: Optimal Exchange Rate Stabilization in a Dollarized Economy with Inflation Targets
N°
WP 2008-04
Title
Optimal Exchange Rate Stabilization in a Dollarized Economy with Inflation Targets
Author(s)
Nicoletta Batini
Language
English
Date
2008/02/28
Abstract
We build a small open-economy model with partial dollarizationhouseholds hold wealth in domestic currency and a foreign currency as in Felices and Tuesta (2006). The degree of dollarization is endogenous to the extent of exchange rate stabilization by the central bank. We identify the optimal monetary policy response under com-mitment and discretion and assess the optimal degree of exchange rate stabilization inthis set up, drawing policy implications for countries that target inflation in economies of this kind.