Twin dollarization and exchange rate policy

• 成果类型: Article
• 署名作者: Shi, Kang; Xu, Juanyi
• 署名单位: Hong Kong University of Science & Technology; Chinese University of Hong Kong
• 刊物名称: JOURNAL OF INTERNATIONAL ECONOMICS
• ISSN/ISSBN: 0022-1996
• DOI: 10.1016/j.jinteco.2010.01.005
• 发表日期: 2010
• 页码: 109-121
• 关键词: Twin dollarization; Exchange rate flexibility; Optimal strategy; welfare

摘要

This paper develops a small open economy general equilibrium model with nominal rigidities to study twin dollarization in East Asian economies, a phenomenon where firms borrow in US dollars and also set export prices in US dollars. In this model, we endogenize both the currency of liability denomination and the currency of export pricing. We show that a key factor that affects firms' dollarization decisions is exchange rate policy. Twin dollarization is an optimal strategy for all firms when exchange rate flexibility is limited, which implies that a fixed exchange rate regime may lead to an equilibrium with twin dollarization. Furthermore, we find that twin dollarization can reduce the welfare loss caused by the fixed exchange rate regime, as it helps to cushion the economy against domestic nominal risk. (C) 2010 Elsevier B.V. All rights reserved.