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How Strong is the Case for Dollarization in Costa Rica? A Note on the Business Cycle Comovements with the United States

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Author Info
Nannette Lindenberg ()
Frank Westermann ()

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Abstract

We evaluate the proposal for official dollarization in Costa Rica by applying a new approach to measure the business cycle comovements with the United States. While the literature often focuses on the correlation of shocks, we point out that the response of each country to the shocks is also an important aspect of stabilization policy. We analyze whether Costa Rica and the United States share a common synchronized response to shocks, i.e. a common business cycle, using the Engle and Kozicki (1993) and Cubadda (1999, 2007) serial correlation common features tests, in a quarterly GDP data set from 1991 to 2008. Although we find some tendency towards common AR(p) structures and common long run trends, we reject the hypothesis that the two countries share a common business cycle. Based on this evidence, we conclude that official dollarization in Costa Rica would impede the efforts of its stabilization policy, despite the relatively high contemporaneous correlation of shocks.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2785.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2785

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Related research
Keywords: dollarization; business cycle comovement; serial correlation common feature; Central America; Costa Rica;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
O54 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

References listed on IDEAS
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    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

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