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Strict Dollarization and Economic Performance: An Empirical Investigation

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  • Edwards, Sebastian
  • Magendzo, I. Igal

Abstract

In this paper we analyze the macroeconomic record of "strictly dollarized" economies. In particular, we investigate whether dollarized countries have historically exhibited faster growth and lower volatility than countries with a domestic currency. We analyze this issue by using a treatment regression analysis that estimates jointly the probability of being a dollarized country, and outcome equations. Our analysis indicates that the probability of being a dollarized country depends on regional, geographical, political, and structural variables. Our results also suggest that GDP per capita growth has not been statistically different in dollarized and in non-dollarized countries. We also find that volatility has been significantly higher in dollarized than in non-dollarized economies. These results are robust to the estimation technique, and to the sample used.

Suggested Citation

  • Edwards, Sebastian & Magendzo, I. Igal, 2006. "Strict Dollarization and Economic Performance: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 269-282, February.
  • Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:1:p:269-282
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    File URL: http://dx.doi.org/10.1353/mcb.2006.0016
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    References listed on IDEAS

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    1. Richard Blundell & Monica Costa Dias, 2000. "Evaluation methods for non-experimental data," Fiscal Studies, Institute for Fiscal Studies, vol. 21(4), pages 427-468, January.
    2. Robert J. Barro, 1998. "Determinants of Economic Growth: A Cross-Country Empirical Study," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522543, March.
    3. Alberto Alesina & Robert J. Barro & Silvana Tenreyro, 2003. "Optimal Currency Areas," NBER Chapters,in: NBER Macroeconomics Annual 2002, Volume 17, pages 301-356 National Bureau of Economic Research, Inc.
    4. Alberto Alesina & Robert J. Barro, 2002. "Currency Unions," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 409-436.
    5. Zeljko Bogetic, 2005. "Official Dollarization: Current Experiences and Issues, Cato Journal, Vol. 20, No. 2 (Fall 2000), 179-213," International Finance 0510006, University Library of Munich, Germany.
    6. Angrist, Joshua D, 2001. "Estimations of Limited Dependent Variable Models with Dummy Endogenous Regressors: Simple Strategies for Empirical Practice," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 2-16, January.
    7. Bernhard, William & Broz, J. Lawrence & Clark, William Roberts, 2002. "The Political Economy of Monetary Institutions," International Organization, Cambridge University Press, vol. 56(04), pages 693-723, September.
    8. Russell W. Cooper & Hubert Kempf, 2001. "Dollarization and the conquest of hyperinflation in divided societies," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-12.
    9. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300.
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    Citations

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    Cited by:

    1. Jeffrey A. Frankel & Shang-Jin Wei, 2004. "Managing Macroeconomic Crises," NBER Working Papers 10907, National Bureau of Economic Research, Inc.
    2. John Duffy & Maxim Nikitin, 2004. "Dollarization Traps," Econometric Society 2004 Latin American Meetings 196, Econometric Society.
    3. Stanisic, Nenad, 2012. "Effects of international monetary integration on inflation, economic growth and current account," MPRA Paper 38938, University Library of Munich, Germany.
    4. Sokic, Alexandre & FABRIS, Nikola, 2013. "Euroization and cyclical stabilization in Montenegro: an empirical analysis," MPRA Paper 46537, University Library of Munich, Germany.
    5. Alexis Cruz-Rodriguez, 2013. "Choosing and Assessing Exchange Rate Regimes: a Survey of the Literature," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 28(2), pages 37-61, October.
    6. Sebastian Edwards, 2006. "Monetary unions, external shocks and economic performance: A Latin American perspective," International Economics and Economic Policy, Springer, vol. 3(3), pages 225-247, December.
    7. Sokic, Alexandre, 2015. "Cost efficiency of the banking industry and unilateral euroisation: A stochastic frontier approach in Serbia and Montenegro," Economic Systems, Elsevier, vol. 39(3), pages 541-551.
    8. Tavlas, George & Dellas, Harris & Stockman, Alan C., 2008. "The classification and performance of alternative exchange-rate systems," European Economic Review, Elsevier, vol. 52(6), pages 941-963, August.
    9. Fabien Candau & Michaël Goujon & Jean-François Hoarau & Serge Rey, 2014. "Real exchange rate and competitiveness of an EU's ultra-peripheral region: La Reunion Island," International Economics, CEPII research center, issue 137, pages 1-21.
    10. Andrew J Swiston, 2011. "Official Dollarization As a Monetary Regime; Its Effectson El Salvador," IMF Working Papers 11/129, International Monetary Fund.
    11. Bedri Kamil Onur Tas & Selahattin Togay, 2008. "Effect of Dolarization on Macroeconomic Performance and Money-Price Relationship in Ecuador," Working Papers 0808, TOBB University of Economics and Technology, Department of Economics.
    12. repec:url:izvest:v:19:y:2018:i:5:p:16-31 is not listed on IDEAS
    13. Aasim M. Husain & Ashoka Mody & Nienke Oomes & Robin Brooks & Kenneth Rogoff, 2003. "Evolution and Performance of Exchange Rate Regimes," IMF Working Papers 03/243, International Monetary Fund.
    14. Osmar Jasan Bolívar Rosales, 2016. "Bolivianization And Effectiveness Of The Monetary Policy," Volúmenes de los Cuadernos de Investigacion Economica Boliviana publicados por el Ministerio de Economía y Finanzas Públicas 2016-2, Ministerio de Economía y Finanzas Publicas de Bolivia.
    15. repec:onb:oenbwp:y::i:126:b:1 is not listed on IDEAS
    16. Sebastian Edwards, 2011. "Exchange Rates in Emerging Countries: Eleven Empirical Regularities from Latin America and East Asia," NBER Working Papers 17074, National Bureau of Economic Research, Inc.
    17. John Hawkins & Paul Masson, 2003. "Economic aspects of regional currency areas and the use of foreign currencies," BIS Papers chapters,in: Bank for International Settlements (ed.), Regional currency areas and the use of foreign currencies, volume 17, pages 4-42 Bank for International Settlements.

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    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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