Lessons from Dollarization in Latin America in the 21st century

In my latest paper with

Emilio Ocampo

and Alex Salter we draw three lessons from dollarization in Latin America in the 21st century. In short, the three main lessons are:

1. If you are going to dollarize, especially in a country with weak institutions such as Argentina, be safe and close down (eliminate) the central bank.

2. Those who defend dollarization the most are the public, in particular low-income households. These individuals can start saving, maybe for the first time in their life.

3. Dollarization does not stop a populist leader to be elected, but it does constrain and limit the amount of economic damage it can instill in the country.

Abstract

This paper looks at 21st-century dollarization in Latin America. We emphasize that dollarization is a complex reform that can be implemented in many different ways. We draw three important lessons from these experiences: (1) keeping the central bank after dollarizing is an unnecessary institutional vulnerability that facilitates compulsive de-dollarization, (2) public opinion offers the most important defense of dollarization against populist attempts at reversal, and (3) even if dollarization is not supported with structural reforms (or such reforms are reversed), it remains superior to the counterfactual of no reforms with persistent, high and volatile inflation.

Download the paper from SSRN.

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