How Much Bang for the Buck? Mexico and Dollarization
Two arguments advanced in favor of Mexico abandoning the peso and adopting the U.S. dollar are to lower exchange rate volatility and inflation. We are not able to identify an independent link between economic growth and either the exogenous component of exchange rate volatility or the exogenous component of inflation. Exchange rate volatility generally reflects other factors, rather than representing an independent growth determinant. The findings are consistent with theoretical predictions that inflation influences growth by affecting financial development. However, we present suggestive evidence that legal reforms offer greater financial development dividends for Mexico than adopting the dollar.
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Volume (Year): 33 (2001)
Issue (Month): 2 (May)
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