Dollarization and the macroeconomic and fiscal performance of the dollarized countries of Latin America

Cindy Gianella Tutiven-Desintonio

Chapter 3 in Central Banking, Monetary Policy and the Political Economy of Dollarization, 2025, pp 49-101 from Edward Elgar Publishing

Abstract: This chapter aims to investigate whether the implementation of dollarization in Ecuador, El Salvador, and Panama has brought with it the different benefits theoretically indicated. Specifically, dollarization is associated with higher economic growth, lower volatility, stable and lower inflation, and lower fiscal deficits. To verify that there have been no significant differences in macroeconomic and fiscal behavior before and after adopting dollarization and between dollarized and non-dollarized countries, a series of econometric estimates are made, such as estimates of means, trends, volatility, equality of means, business cycle dating, and synthetic control analysis for GDP per capita. The results indicate that dollarization has been an effective mechanism for reducing inflation in the countries that have adopted it, but there is no significant difference compared to other economies with their own currency. Likewise, the rest of the main macroeconomic and fiscal variables of Ecuador, El Salvador, and Panama do not show significant differences: neither between periods (before and after dollarization) nor between selected countries with their own currency. Finally, it is also necessary to point out that there are still many gaps in the knowledge of how a dollarized economy operates and the elements that ensure its sustainability. Therefore, this chapter also details the theoretical and operational aspects of this monetary regime, how the country's private financial institutions create money in a dollarized economy, the financing operation of the Central Bank of Ecuador for the Ecuadorian government as of 2014 (despite being a dollarized economy), and some of the sustainability risks of dollarization.

Keywords: Dollarization; Ecuador; El Salvador; Panama; Economic growth; Fiscal policy (search for similar items in EconPapers)
Date: 2025
ISBN: 9781803925325
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