DOLLARIZATION,INFLATIONANDGROWTH.pdfVIP

DOLLARIZATION, INFLATION AND GROWTH* By Sebastian Edwards University of California, Los Angeles And National Bureau of Economic Research And I. Igal Magendzo Central Bank of Chile November, 2001 ABSTRACT In this paper we analyze the macroeconomic record of dollarized economies. In particular, we investigate whether, as its supporters’ claim, dollarization is associated with lower inflation and faster growth. We analyze this issue by using a matching estimator technique developed in the training evaluation literature. Our findings suggest that inflation has been significantly lower in dollarized nations than in non-dollarized ones. We also find that dollarized nations have had a lower rate of economic growth than non-dollarized ones. Finally, we find that macroeconomic volatility is not significantly different across dollarized and non-dollarized economies. We conjecture that the lower rate of economic growth in dollarized countries is due, at least in part, to these countries’ difficulties in accommodating external disturbances, such as major term of trade and capital flows shocks. * We have benefited from discussions with John Cochrane, Barry Eichengreen, Eduardo Engel and Ed Leamer. 1 I. Introduction The recurrence of currency crises in emerging countries has generated an intense debate on exchange rate policies. Pegged-but-adjustable exchange rate regimes have rapidly lost adepts, while hard pegs and freely floating rates have gained in popularity (See Summers 2000 and Fischer, 2001). A growing number of economists have gone as far as arguing that (many) emerging nations shoul