Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/189527 
Year of Publication: 
2006
Series/Report no.: 
Development Research Working Paper Series No. 10/2006
Publisher: 
Institute for Advanced Development Studies (INESAD), La Paz
Abstract: 
This paper evaluates welfare under optimal monetary and fiscal policy in a dynamic stochastic model of currency substitution and capital. It shows that in a partially dollarized economy, the main optimal policy results, i.e. the Friedman Rule and the zero capital tax, hold. Welfare implications of these optimal policies are computed for the Bolivian economy using a second-order approximation technique. The primary conclusions are that the welfare gains under optimal monetary policy are negligible. The welfare gains when optimal fiscal policy is considered alone or in conjunction with optimal monetary policy are sizable and come from the increase in real variables and also by the increase in real balances in local currency. Thus, welfare gains are negatively related to dollarization.
Subjects: 
Dollarization
Optimal Fiscal and Monetary Policy
Second-order approximation technique.
JEL: 
F31
E61
E63
Document Type: 
Working Paper

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