MPIA-20260 Exchange rate policy in a dollarized economy: Implications on growth and employment in Bolivia

Abstract

In the last ten years, Bolivia has experienced unprecedented economic conditions. Annual economic growth has been on average 5%. Poverty levels have been reduced in around 20 percentage points. The Non-Financial Public Sector has experienced eight years of fiscal surplus (2006-2013) as well as the current account (2006-2014). But these favourable conditions seem to be reached an inflection point and important economic policy decisions have to be taken in order to prevent an economic collapse. One of these decisions and perhaps the most important is whether to maintain the fixed exchange rate policy that has been adopted since 2011. But this is a tough decision as it involves putting in risk the process of bolivianization (the opposite of dollarization), the control of the inflation and the equilibrium of the financial system. Therefore this research proposal aims to analyze how a devaluation policy could impact the economic growth, the composition of the economic sectors, employment and poverty. The analysis will be based on a CGE model, based on an updated Social Accounting Matrix (SAM) and with the novelty that the devaluation will be endogenous to the model in the sense that the actual economic conditions like the deficit of the current account, the declining international reserves and a self-fulfilling demand for dollars, will push the exchange rate to devaluate. Thus, the model will answer also the question: How long could be maintained the fixed exchange rate policy, before it collapses by itself? As usual in this type of models, different scenarios will be simulated before and after the devaluation.


Members

Project leader: Carlos Gustavo Machicado

Project researchers: Beatriz Cristina Muriel Hernández | Alejandra Goytia | Alejandro Herrera Jimenez


Working Papers

No working papers.


Policy Briefs

No policy briefs.


Proposal

Title Modified Size Comments Recommendations
Exchange rate policy in a dollarized economy: Implications on growth and employment in Bolivia 2018-09-18 850.04kB 0 0

Final report

No final reports.


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