Exchange rate pass-through in Latin America: Does dollarization matter?

Vincent Notte
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Vincent Notte: UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)

No 2026007, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: Despite extensive evidence that Exchange Rate Pass-Through (ERPT) has declined in both developing and advanced economies, the mechanisms behind it remain debated. This paper shows that shifts in dollarization can explain a substantial part of this decline in Latin America. Using panel data for seven countries from 1995–2019, we find that ERPT fell sharply from 42 to 15 percent. Lower dollarization significantly dampens ERPT: a one-percentage-point decline in dollarization reduces ERPT by 0.25 percentage points. This channel is quantitatively important—for example, in Peru, de-dollarization can explain a 10-percentage-point fall in ERPT over the sample period. Given the persistently high levels of dollarization in the region, further reductions could significantly dampen the ERPT. Our findings highlight dollarization as a central, yet previously underappreciated, determinant of ERPT.

Keywords: Exchange Rate Pass-Through; Dollarization; Inflation; Latin America (search for similar items in EconPapers)
JEL-codes: F31 F33 O54 (search for similar items in EconPapers)
Date: 2026-03-13
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2026007

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