Can dollarization mitigate the macroeconomic cost of populism? Lessons from Latin America

The dollarization debate can be summarized as a trade-off between credibility and flexibility. Argentina is again at its center. Its traumatic exit from a currency board regime in January 2002 convinced many academics that flexibility was more important than credibility. However, its experience since then shows that flexibility in the hands of populist governments can lead to disastrous results. In this paper we employ a variety of statistical techniques to attempt to verify the empirical validity of the hypothesis that dollarization can significantly reduce the macroeconomic cost of left-wing populism. We focus our analysis on Argentina (non-dollarized populism) and Ecuador (dollarized populism). We find that, in terms of real GDP per capita, populism was less costly in Ecuador than in Argentina.