Costs and Benefits of Dollarization: Evidence from North, Central, and South America

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at https://about.jstor.org/terms Center for Economic Integration, Sejong University is collaborating with JSTOR to digitize, preserve and extend access to Journal of Economic Integration This content downloaded from 88.255.218.253 on Mon, 16 Oct 2023 12:58:43 +00:000 0 0 0 0 0 0 0 0 0 0 All use subject to https://about.jstor.org/terms Abstract This paper examines the macroeconomic costs and benefits of dollarization. Economic theory suggests that the main benefit is enhanced price stability, while the main cost is higher business-cycle volatility if the dollarizing country's output is not sufficiently correlated with that of the U.S. Data from 1950-1997 are used to estimate various cost and benefit measures for nineteen North, Central, and South American countries. The paper finds that these cost and benefit factors exhibit substantial variability across the countries considered. Furthermore, they are strongly positively correlated: countries (such as Peru) that have a lot to gain from dollarization, also have a lot to lose from it; while countries (such as Canada) that have little to lose by dollarizing, have also little to gain by it. The empirical results can be also used to compare net benefits for individual countries, showing, for example, that Chile is a better dollarization candidate than Mexico. • JEL Classifications: E42, F36, F42 •