Fix vs. Float: Evaluating the Transition to a Sustainable Equilibrium in Bolivia

32 Pages Posted: 31 Mar 2022

See all articles by Andres Gonzalez Gomez

Andres Gonzalez Gomez

International Monetary Fund (IMF) - Institute for Capacity Development

Etibar Jafarov

International Monetary Fund - European Department

Diego Rodriguez Guzman

International Monetary Fund (IMF)

W. Christopher Walker

International Monetary Fund (IMF)

Date Written: February 1, 2022

Abstract

Bolivia has achieved noteworthy success over the past 15 years in raising incomes, reducing poverty, and maintaining macroeconomic stability by deploying commodity revenues to finance transfers, public investment, and state-led development, using an exchange rate peg as a policy anchor. However, with the end of the commodity boom in 2014, fiscal deficits have grown and reserves have fallen. One route to restoring long-run sustainability would be to combine fiscal consolidation with a switch to a floating exchange rate. However, a preference for maintaining the peg could be accommodated with adjustments elsewhere in the policy framework. Employing a detailed dynamic stochastic general equilibrium model of the Bolivian economy, this study assesses the long-run sustainability and relative benefits of alternative policy combinations, and calculates optimal adjustment paths for the transition from the present situation to the steady state. It concludes that continued adherence to a fixed-rate regime, while not optimal, is feasible, if supported by a larger fiscal effort.

Keywords: Bolivia, inflation target, fixed exchange rate, speculative attack, transition path, linear time iteration, time consistency., transition path, commodity revenue, long-run sustainability, open economy, utility function, Exchange rate arrangements, Conventional peg, Floating exchange rates, Government debt management, Exchange rate flexibility

JEL Classification: C61, F32, F33, F41, F31, H63, E62, O24

Suggested Citation

Gonzalez Gomez, Andres and Jafarov, Etibar and Rodriguez Guzman, Diego and Walker, W. Christopher, Fix vs. Float: Evaluating the Transition to a Sustainable Equilibrium in Bolivia (February 1, 2022). IMF Working Paper No. 2022/043, Available at SSRN: https://ssrn.com/abstract=4070777

Andres Gonzalez Gomez (Contact Author)

International Monetary Fund (IMF) - Institute for Capacity Development ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Etibar Jafarov

International Monetary Fund - European Department ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Diego Rodriguez Guzman

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

W. Christopher Walker

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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