The Impact of Dollarisation on Economic Growth, Investment, and Trade

Dollarisation has been extensively debated and is often promoted as a viable monetary and exchange rate policy alternative for emerging economies. While most arguments for and against dollarisation are grounded in theory, there is a recognized scarcity of empirical evidence on the topic. This study evaluates over two decades of dollarisation experience in emerging economies. Our results suggest that dollarisation is associated with similar economic growth levels as other exchange rate regimes. However, it comes with the cost of more negative current account balance growth rates and heightened growth volatility, especially in the past decade. Nevertheless, dollarised countries benefit from higher levels of investment and trade. Contrary to a significant part of the existing literature, our findings challenge the perceived benefits of dollarisation in terms of economic growth. Additionally, we demonstrate that dollarised countries differ in various macroeconomic indicators when compared to individual exchange rate regimes, even against other fixed exchange rate regimes - which are often assumed to be homogenous.