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Dollarization and default risk: a brief note

Author

Listed:
  • Emilio Ocampo
  • Nicolás Cachanosky

Abstract

In this brief note, we evaluate the conclusions of a recent paper by Lopez Almirante and Neumeyer (2024). Simulations of a well-known model calibrated for Ecuador led them to conclude that dollarization can lead to a higher probability of a sovereign default and that only a high inflation rate would make it a welfare enhancing option for a non-dollarized economy. We find data misspecification and erroneous assumptions invalidate the results of the analysis.

Suggested Citation

  • Emilio Ocampo & Nicolás Cachanosky, 2024. "Dollarization and default risk: a brief note," CEMA Working Papers: Serie Documentos de Trabajo. 871, Universidad del CEMA.
    • Handle: RePEc:cem:doctra:871
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    File URL: https://ucema.edu.ar/sites/default/files/2024-06/dt871.pdf
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    References listed on IDEAS

    as
    1. Uribe, Martin, 2006. "A fiscal theory of sovereign risk," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1857-1875, November.
    2. Sims, Christopher A, 2001. "Fiscal Consequences for Mexico of Adopting the Dollar," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 597-616, May.
    3. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
    4. Porzecanski, Arturo C., 2010. "When Bad Things Happen to Good Sovereign Debt Contracts: The Case of Ecuador," MPRA Paper 20857, University Library of Munich, Germany.
    5. Juan-Pablo Erraez & Julien Reynaud, 2022. "Central Bank Balance Sheet Expansion in a Dollarized Economy: The Case of Ecuador," IMF Working Papers 2022/234, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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