(Preliminary and incomplete) This paper compares the performance of a currency board arrangement, in‡ation targeting, and dollarization in a small open, developing economy with liberalized capital account in terms of agents ’ welfare and the dynamic pattern of the main macro aggregates. The analysis focuses explicitly on the transmission mechanism of shocks to currency and default risk premia in international …nancial markets. The model presented is calibrated and estimated for Argentina. Preliminary evidence suggests that the model …ts the data relatively well in the sense that it can explain the estimated dynamic response of output, employment, and relative prices to the shocks considered. We shows also that the main determinant of the Argentinean short term business cycle is default risk; thus, suggesting that one of the direct gains from moving to full dollarization may be small. (This version of the paper is incomplete and does not report calibration results and welfare analysis.
To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.