Exchange Rate and Inflation Dynamics in Dollarized Economies

Luis Carranza, Jose Enrique Galdon-Sanchez () and Javier Gómez Biscarri ()

No 10/04, Faculty Working Papers from School of Economics and Business Administration, University of Navarra

Abstract: Is the degree of dollarization important to determine the pass-through between nominal exchange rate depreciation and inflation? The common view in the literature is that countries with higher dollarization present higher pass-through coefficients. In our study we qualify this common view. Using a sample of fifteen emerging-market countries with different degrees of dollarization, we find that the pass-through in highly dollarized economies is indeed higher, but it also tends to be more asymmetric than in economies with a lower degree of dollarization: We define asymmetric pass-through as the presence of a negative pass-through coefficient during economic downturns. The reason for this asymmetry is the negative balance-sheet effect that can dominate the positive competition effect generated by real exchange rate depreciations.

JEL-codes: F31 F33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: 2004-05
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Journal Article: Exchange rate and inflation dynamics in dollarized economies (2009)
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