We develop a small open economy general equilibrium model with sticky prices and partial dollarization -- a situation where both domestic and foreign currencies coexist. We derive a tractable representation of the model in terms of domestic inflation and the output gap in which a trade-off,...

In the data, Real Exchange Rates (RERs) tend to move in opposite directions with respect to the relative consumption across countries. Chari <italic>et al</italic>. (2002) refer to the inability of models to replicate the previous stylized fact as the consumption-RER anomaly. In this article, it is shown that an...