Dollarization: Beneficial or Not? A Study of Two Latin American Countries

This manuscript elaborates on the macroeconomic argument of dollarization. Why would a country even consider giving up its currency for a foreign one (i.e. the US dollar)? Could it really be a solution to its problems? The last few years have been turbulent. Economically speaking many currencies have lost their purchasing power and people’s perceived quality of life seems to have decreased, causing a rising social discontent. Inflation has been at its highest since the 1980 crisis and it seems as if there was no way out but to cope with it. Indeed, it may be the only way, but could have the dollarization adoption and therefore reliance on the central bank from another country improved the economic performance and, in some cases, avoid a free fall for some states? The recent widespread inflation has its origin in diverse phenomena, among them sustained monetary expansion and supply shocks. However, for some countries, this problem is rooted in their institutions, which do not apply possible solutions such as fiscal and monetary tightening. The need to recover credibility and to stop erratic policies may find its place in the dollarization implementation. First, this study introduces a theoretical framework to model the macroeconomic environment. Subsequently the possible causes to renouncing the own currency are analyzed, to finally discuss the positive and negative consequences on the local economies. Each case has its own characteristics, hence drawing general conclusions can be misleading. However, this study intends to identify signals and features possessed by an economy, in which a measure like the above mentioned one would be most suitable. In the initial stage a collection of data from the international monetary fund, world bank and different central banks is performed. Then a brief statistical analysis to describe the local economies is carried out. Late on, implementing difference-in-differences we analyze as our subjects of study the cases of countries 4 such as Ecuador, Panama, El Salvador, Zimbabwe, and others. After gathering some conclusions, it is also intended to understand whether the studied phenomenon can become a more recurrent one over time and to comprehend whether it’s fit for cases as the Argentinian one