Exchange rate and inflation dynamics in dollarized economies

Luis Carranza (), Jose Galdon-Sanchez () and Javier Gomez-Biscarri
Authors registered in the RePEc Author Service: Javier Gómez Biscarri

Journal of Development Economics, 2009, vol. 89, issue 1, 98-108

Abstract: We use a panel of a hundred-plus countries with differing degrees of dollarization to perform an empirical analysis of the effects on inflation of exchange rate depreciations. The results qualify the common view that countries with higher dollarization exhibit higher inflation pass-through. We show that large depreciations tend to generate a negative impact on the pass-through coefficient, this impact being more intense the higher the level of dollarization of the economy. We interpret this as evidence that, in highly dollarized economies, the classic inflationary effects of a real depreciation--higher internal demand and imported inflation--can be offset or diminished by both the larger financial costs and the balance-sheet effect, especially if the depreciation is "large". Additionally, the exchange rate regime is shown to matter: countries with fixed exchange rates suffer more noticeably the balance-sheet effects of large depreciations.

Keywords: Inflation; pass-through; Dollarization; Balance-sheet; effect; Developing; economies (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (30)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:89:y:2009:i:1:p:98-108

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