Optimal monetary policy in a dollarized economy

Nguyen, Tri Dung (2019). Optimal monetary policy in a dollarized economy. University of Birmingham. Ph.D.

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Abstract

This thesis attempts to specify an optimal monetary policy for a developing country with partial dollarization. In particular, optimal monetary policy options are investigated within the context of an estimated Dynamic Stochastic General Equilibrium (DSGE) model in order to examine the interaction of the monetary authority with the rest of the economy.

The first chapter introduces the research questions, scope of the research, and a brief illustration of dollarization in developing countries in general and Vietnam in particular. Chapter 2 begins with the formulation of an open economy DSGE model with typical features of a developing country, including partial dollarization and a chronic budget deficit fiscal rule. A parameterized version of the model is then simulated to investigate the sensitivity and significance of various nominal and real frictions in the model. The remainder of the chapter is devoted to an examination of the role of partial dollarization feature in the model economy.

Chapter 3 estimates the theoretical model using a dataset from Vietnam - a developing country in the Southeast Asia. This is the first estimated DSGE model for Vietnam, as far as my supervisors and I are aware. In particular, the model is estimated with Bayesian estimation method based on thirteen macroeconomic series with the presence of orthogonal structural shocks on both supply and demand side. The final section of this chapter is devoted to a discussion of the relative importance of various shocks and frictions for explaining the dynamics of the model economy and an evaluation of the model’s empirical properties using standard validation techniques.

Estimation results are then integrated in the fourth chapter in order to specify an optimal monetary policy under the estimated model. The first section introduces Currie & Levine (1993)’s method to optimal policy problem which uses standard control state-space approach and Bellman’s principle of optimality. Following the derivation of the optimal monetary policy problem with linear, forward-looking constraints and a quadratic objective, asymptotic losses are then presented for a Ramsey policy, a discretionary policy, and an ex ante optimized simple Taylor-type rule. The last section of the chapter discusses the dynamics of the model economy under optimal policy. Among the major findings was the superiority of the optimal Ramsey policy over other policy options.

Chapter 5 concludes with some brief comments on the results of general interest, the contributions of the research, and then proposes a potential agenda for future research.

Type of Work:

Thesis (Doctorates > Ph.D.)

Award Type:

Doctorates > Ph.D.

Supervisor(s):