Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212479 
Year of Publication: 
2000
Series/Report no.: 
BOFIT Discussion Papers No. 12/2000
Publisher: 
Bank of Finland, Institute for Economies in Transition (BOFIT), Helsinki
Abstract: 
The impact of an unanticipated monetary shock in a small open economy with dollarization, factor price rigidities, and nontradeables is re-examined in an optimizing intertemporal general equilibrium model.The framework of an earlier study is extended to incorporate foreign real money balances into the representative agent's utility function and to account for the phenomenon of dollarization so characteristic of transition economies.The major finding is that in the event of small monetary shocks, the presence of dollarization does not alter the outcome that relates the sign of response of consumption, current account balance, and other macroeconomic variables to the difference between intertemporal and intratemporal elasticities of substitutions of the total consumption index.The solution also shows that the elasticity of intertemporal substitution of money services and the share of traded goods in total consumption - a proxy for openness of the economy - are the crucial parameters in determining the response and the possibility of overshooting of the model variables, with economic openness playing a stabilizing role for the economy in the event of monetary shocks.
Subjects: 
New open-economy macroeconomics
Monetary shocks
Dollarization
Factor price rigidities
Nontradeables
Current Account
Persistent Identifier of the first edition: 
ISBN: 
951-686-938-6
Document Type: 
Working Paper

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