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Analysis of the impact of dollarization and CAFTA-DR on El Salvador's trade flows

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  • Sandoval, Luis
  • Malaga, Jaime E.
  • Carpio, Carlos E.

Abstract

In January of 2001, El Salvador adopted the U.S. dollar as its currency, going through a full dollarization process that fixed the exchange rate at 8.75 colones (El Salvador’s former currency) per U.S. dollar and that took the colón out of circulation. Dollarization was expected to increase trade and attract international investment among other benefits. Later, in 2005, El Salvador signed CAFTA-DR which is a bilateral trade agreement between the United States and five Central American countries and the Dominican Republic. CAFTA-DR was also expected to increase trade, especially exports to the United States, El Salvador’s main commercial partner. Although several studies were conducted to evaluate the potential benefits of these two events on El Salvador’s Trade flows, studies evaluating the actual impact of these events are very limited. To evaluate the actual impact of these two events on trade flows we estimate two gravity models (one for imports and one for exports) using panel data on trade flows between El Salvador and 13 other countries between 1994 to 2012. Our preliminary results suggest that dollarization and CAFTA-DR did not have a major effect on El Salvador’s bilateral trade.

Suggested Citation

  • Sandoval, Luis & Malaga, Jaime E. & Carpio, Carlos E., 2015. "Analysis of the impact of dollarization and CAFTA-DR on El Salvador's trade flows," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 196817, Southern Agricultural Economics Association.
    • Handle: RePEc:ags:saea15:196817
    DOI: 10.22004/ag.econ.196817
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    References listed on IDEAS

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    1. Baldwin, Richard & Taglioni, Daria, 2006. "Gravity for Dummies and Dummies for Gravity Equations," CEPR Discussion Papers 5850, C.E.P.R. Discussion Papers.
    2. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-481, August.
    3. Alberto Alesina & Robert J. Barro, 2001. "Dollarization," American Economic Review, American Economic Association, vol. 91(2), pages 381-385, May.
    4. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 15(30), pages 08-45.
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    Cited by:

    1. Juan René Rojas Rodríguez & Xenia Matschke, 2023. "The CAFTA-DR Free Trade Agreement — Analyzing its effects in a modern gravity framework," International Economics and Economic Policy, Springer, vol. 20(1), pages 27-93, February.

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