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Title:The effects of real exchange rate shocks in an economy with extreme liability dollarization PDF Logo
Authors:Melander, Ola
Issue Date:2009
Series/Report no.:SSE/EFI Working Paper Series in Economics and Finance 715
Abstract:This paper studies the effects of real exchange rate depreciation in an economy with extreme liability dollarization using vector autoregression (VAR) methods. Bolivia's extreme liability dollarization makes it an interesting case for empirical testing of the contractionary-depreciations hypothesis. In contrast to the previous contractionary-depreciations literature, the paper uses identification assumptions which are inspired by modern macroeconomic theory and common in the empirical VAR literature on the effects of monetary policy. I find that a real exchange rate depreciation has negligible effects on output, since a contractionary balance-sheet effect on investment is counteracted by the standard expansionary effect on net exports. Furthermore, I find that a real depreciation has inflationary effects. A key finding is that the identification assumptions used in this paper gives more reasonable results than alternative assumptions used in the previous literature.
Subjects:Real exchange rate
VAR
liability dollarization
balance sheet effects
contractionary depreciation
JEL:E44
F41
G15
Document Type:Working Paper
Appears in Collections:SSE/EFI Working Paper Series in Economics and Finance, EFI - The Economic Research Institute, Stockholm School of Economics

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