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Official Dollarization in Latin America: Could it Work?

  • Paul Hallwood

    (University of Connecticut)

  • Ian W. Marsh

    (City University Business School)

  • Jorg Scheibe

    (University of Oxford)

We investigate the case for official dollarization in a selection of Latin American countries. We argue that the monetary shock absorbers of base control, foreign exchange reserve sterilization and exchange rate policy should be retained the more volatile is a country's actual real exchange rate. Our investigation of the asymmetry of macroeconomic shocks between the USA and Latin America suggests that the time series property of the real exchange rate is likely to be one of such volatility that it is advisable to retain at least some monetary shock absorbers. The case for official dollarization is further weakened by the unlikelihood of international agreements to accommodate Federal Reserve management of the dollar base to Latin American requirements.

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File URL: http://web2.uconn.edu/economics/working/2001-06.pdf
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2001-06.

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Length: 24 pages
Date of creation: Aug 2001
Date of revision:
Handle: RePEc:uct:uconnp:2001-06
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Web page: http://www.econ.uconn.edu/

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  1. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
  2. Francois R. Velde & Marcelo Veracierto, 2000. "Dollarization in Argentina," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 24-37.
  3. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Tamim Bayoumi, 1991. "The Effect of the ERMon Participating Economies," IMF Working Papers 91/86, International Monetary Fund.
  5. Stephanie Schmitt-Grohe & Martin Uribe, 2000. "Stabilization Policy and the Costs of Dollarization," Departmental Working Papers 200006, Rutgers University, Department of Economics.
  6. Guillermo A. Calvo, 2001. "Capital markets and the exchange rate with special reference to the dollarization debate in Latin America," Proceedings, Federal Reserve Bank of Cleveland, pages 312-338.
  7. Tamim Bayoumi and Barry Eichengreen., 1992. "Shocking Aspects of European Monetary Unification," Economics Working Papers 92-187, University of California at Berkeley.
  8. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-48, September.
  9. Bayoumi, Tamim & Eichengreen, Barry, 1994. "Monetary and exchange rate arrangements for NAFTA," Journal of Development Economics, Elsevier, vol. 43(1), pages 125-165, February.
  10. Paul Hallwood, C. & MacDonald, Ronald & Marsh, Ian W., 2000. "Realignment expectations and the US dollar, 1890-1897: Was there a 'Peso problem'?," Journal of Monetary Economics, Elsevier, vol. 46(3), pages 605-620, December.
  11. David E. Altig & Owen F. Humpage, 1999. "Dollarization and monetary sovereignty: the case of Argentina," Economic Commentary, Federal Reserve Bank of Cleveland, issue Sep.
  12. anonymous, 1999. "Responding to global crises: dollarization in Latin America," EconSouth, Federal Reserve Bank of Atlanta, issue Q2, pages 14-19.
  13. Mark M. Spiegel, 1999. "Dollarization in Argentina," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue sep24.
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