A new paper "Dominant Currency Paradigm: Financial Dollarization View" in the Working Paper Series of the National Bank of Georgia
The National Bank of Georgia publishes the next paper in its NBG Working Paper Series. The working papers aim to present research on topics relevant to central banks and economics profession. The papers are circulated to elicit comments and encourage debate on ongoing research. The Working Paper Series are coordinated by the Macroeconomic Research Division and focus on topics relevant for central bank policy, including macroeconomic modeling, monetary and exchange rate policies, financial stability, etc.
The next working paper in the series titled "Dominant Currency Paradigm: Financial Dollarization View" was prepared by the NBG staff, Tamta Sopromadze and Shalva Mkhatrishvili, as well as Giorgi Barbakadze, Advisor at the International Monetary Fund. The aim of this paper is to analyze the role of financial dollarization in exchange rate pass-through. Based on a panel of countries with partially dollarized economies the impact of dominant currency exchange rates on inflation is empirically estimated. As this empirical exercise shows, the higher the financial dollarization the higher is the exchange rate pass-through to inflation - partially weakening the shock-absorbing role of the exchange rate. On the theoretical front, a simple dynamic stochastic general equilibrium (DSGE) model is built to reinforce the above result and describe the mechanics. The results provide interesting insights for monetary policymakers, especially for countries with small open and dollarized economies that are exposed to external shocks.
The working papers can be accessed at the following page.