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Full dollarization: the case of Panama

Author

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  • Goldfajn, Ilan
  • Olivares, Gino

Abstract

This paper analyzes the case of Panama, one of the largest countries currently adopting the dollar as its legal tender, and evaluates some of the predictions of the theory on the costs and benefits of full dollarization. The main conclusions drawn from the case of Panama are that on one hand, dollarization does not guarantee fiscal discipline, the elimination of currency risk does not preclude default risk or the high volatility of sovereign spreads, and that dollarization may increase slightly GDP growth volatility. On the other hand, a dollarized economy delivers an impressive inflation performance and may even reduce the impact of external confidence shocks, although not external real shocks. Finally, it is not clear whether the low interest rates in Panama are a consequence of the dollarization regime or the competitive internationalized banking system.
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Suggested Citation

  • Goldfajn, Ilan & Olivares, Gino, 2001. "Full dollarization: the case of Panama," LSE Research Online Documents on Economics 123237, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:123237
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    File URL: https://researchonline.lse.ac.uk/id/eprint/123237/
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    Cited by:

    1. Rösl, Gerhard & Seitz, Franz, 2024. "Uncertainty, politics, and crises: The case for cash," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 5(3).

    More about this item

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System

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