Exchange Rate and Inflation Dynamics in Dollarized Economies

Luis Carranza (), José E. Galdón-Sánchez () and Javier Gómez Biscarri
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José E. Galdón-Sánchez: Public University of Navarra
Authors registered in the RePEc Author Service: Jose Enrique Galdon-Sanchez ()

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

Abstract: In this paper we build a model of a dollarized economy with imperfect financial markets to analyze and qualify the common view that countries with higher dollarization exhibit higher pass-through. We show that the classic inflationary effects of a real depreciation -higher internal demand and imported inflation- can be offset or diminished in a dollarized economy by higher financial costs and a balance-sheet effect. Thus, pass-through coefficients could be smaller or even negative in economies with a high degree of dollarization. We test the implications of the model using a panel of a hundred-plus countries with differing degrees of dollarization. The results confirm that pass-through coefficients are higher in more dollarized economies, but they also show that large depreciations tend to generate a negative impact on the pass-through coefficient, this impact being higher the higher the level of dollarization of the economy. Additionally, the exchange rate regime is shown to matter, in that countries with fixed exchange rates suffer larger balance-sheet effects of depreciations.

JEL-codes: F31 F33 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2004-05-01
New Economics Papers: this item is included in nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

Published, Journal of Development Economics 89:1 (2009), 98-108.

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Journal Article: Exchange rate and inflation dynamics in dollarized economies (2009)
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