Dollarization and outliers
Dollarization has been a recent topic of discussion in countries like Argentina and Venezuela. In extreme cases, dollarization is the only way to end out-of-control inflation. An inverse case is that of Zimbabwe, which de-dollarize (de jure) in 2019 after a decade of using the U.S. dollar. Zimbabwe walked straight back into high inflation.
These countries are not just bad economic performers. They are outliers. In the last twenty years, they held the world record for years with inflation above 10 percent and negative GDP growth rates. El Salvador, Ecuador, and Panama, dollarized economies in Latin America, depict opposite results.
Below I replicate’s interesting plot he published in our “Dollarize Argentina” blog.
In my experience, Argentine experts who are critics of dollarization believe that the standard models and policy tools can bring inflation under control. The problem is not about choosing the right monetary policy, the problem is institutional. Models and tools that presuppose political credibility and a robust institutional framework are inapplicable (in a sustainable way) in extreme cases like this.
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