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Dollarization dynamics: A comment

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  • Emilio Ocampo
  • Nicolás Cachanosky

Abstract

We analyze a recent paper that claims that dollarizing an economy in the presence of a “dollar shortage” will provoke an immediate sharp reduction in real output and welfare. We find many problems with the model that supports this conclusion: confusion about the nature of a dollar shortage and its practical implications, invalid assumptions, invariant calibration in the presence of a regime change and lack of empirical testing. In our opinion, the paper does not make a valuable contribution to the dollarization debate nor provide useful guidance to policymakers. The proposed model is based on unrealistic assumptions and its predictions are contradicted by the available evidence. A more promising and useful line of research would have been to investigate what happens to a dollarized economy in a scenario of exchange rate overshooting and how it compares in relation to other stabilization plans.

Suggested Citation

  • Emilio Ocampo & Nicolás Cachanosky, 2023. "Dollarization dynamics: A comment," CEMA Working Papers: Serie Documentos de Trabajo. 855, Universidad del CEMA.
    • Handle: RePEc:cem:doctra:855
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    References listed on IDEAS

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    1. Frederick Solt, 2020. "Measuring Income Inequality Across Countries and Over Time: The Standardized World Income Inequality Database," Social Science Quarterly, Southwestern Social Science Association, vol. 101(3), pages 1183-1199, May.
    2. Mr. Luis Ignacio Jácome, 2004. "The Late 1990's Financial Crisis in Ecuador: Institutional Weaknesses, Fiscal Rigidities, and Financial Dollarization At Work," IMF Working Papers 2004/012, International Monetary Fund.
    3. Beckerman, Paul, 2001. "Dollarization and semi-dollarization in Ecuador," Policy Research Working Paper Series 2643, The World Bank.
    4. Emilio Ocampo, 2023. "Dollarization as an Effective Commitment Device: The Case of Argentina," CEMA Working Papers: Serie Documentos de Trabajo. 848, Universidad del CEMA.
    5. Tomás E. Caravello & Pedro Martinez-Bruera & Iván Werning, 2023. "Dollarization Dynamics," NBER Working Papers 31296, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Dollarization; Dynamics; Dollar shortage;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F30 - International Economics - - International Finance - - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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