How Strong is the Case for Dollarization in Costa Rica? A Note on the Business Cycle Comovements with the United States

21 Pages Posted: 29 Sep 2009

See all articles by Nannette Lindenberg

Nannette Lindenberg

German Development Institute/Deutsches Institut für Entwicklungspolitik (DIE)

Frank Westermann

University of Osnabrueck - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: September 2009

Abstract

We evaluate the proposal for official dollarization in Costa Rica by applying a new approach to measure the business cycle comovements with the United States. While the literature often focuses on the correlation of shocks, we point out that the response of each country to the shocks is also an important aspect of stabilization policy. We analyze whether Costa Rica and the United States share a common synchronized response to shocks, i.e. a common business cycle, using the Engle and Kozicki (1993) and Cubadda (1999, 2007) serial correlation common features tests, in a quarterly GDP data set from 1991 to 2008. Although we find some tendency towards common AR(p) structures and common long run trends, we reject the hypothesis that the two countries share a common business cycle. Based on this evidence, we conclude that official dollarization in Costa Rica would impede the efforts of its stabilization policy, despite the relatively high contemporaneous correlation of shocks.

Keywords: dollarization, business cycle comovement, serial correlation common feature, Central America, Costa Rica

JEL Classification: E32, F36, O54

Suggested Citation

Lindenberg, Nannette and Westermann, Frank, How Strong is the Case for Dollarization in Costa Rica? A Note on the Business Cycle Comovements with the United States (September 2009). CESifo Working Paper Series No. 2785. Available at SSRN: https://ssrn.com/abstract=1479454

Nannette Lindenberg (Contact Author)

German Development Institute/Deutsches Institut für Entwicklungspolitik (DIE) ( email )

Tulpenfeld 6
Bonn, 53113
Germany

Frank Westermann

University of Osnabrueck - Department of Economics ( email )

Rolandstr. 8
Osnabrueck, D-49069
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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