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Fiscal Consequences for Mexico of Adopting the Dollar.

  • Political Science


Dollarization implies a reduction in the menu of assets available to the government and to the private sector in managing risk. Whatever the gains from dollarization, the costs of reducing the asset menu need to be weighed against them. This paper presents models, one a simple generalization of a well-known model of tax smoothing by Barro, in which these costs are explicit. Along the way, it suggests that there is likely to be no reduction in interest costs to the government from dollarization.

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