Full Dollarization: The Case of Panama

46 Pages Posted: 28 Nov 2000

See all articles by Ilan Goldfajn

Ilan Goldfajn

Gávea Investimentos; Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics; Central Bank of Brazil

Gino Olivares

Insper Institute of Education and Research; Pontifical Catholic University of Rio de Janeiro (PUC-Rio)

Abstract

This paper analyzes the case of Panama, one of the largest countries currently adopting the dollar as its legal tender, and evaluates some of the predictions of the theory on the costs and benefits of full dollarization. The main conclusions drawn from the case of Panama are that on one hand, dollarization does not guarantee fiscal discipline, the elimination of currency risk does not preclude default risk or the high volatility of sovereign spreads, and that dollarization may increase slightly GDP growth volatility. On the other hand, a dollarized economy delivers delivers an impressive inflation performance and may even reduce the impact of external confidence shocks, although not external real shocks. Finally, it is not clear whether the low interest rates in Panama are a consequence of the dollarization regime or the competitive internationalized banking system.

JEL Classification: F33

Suggested Citation

Goldfajn, Ilan and Olivares, Gino, Full Dollarization: The Case of Panama. Available at SSRN: https://ssrn.com/abstract=228898 or http://dx.doi.org/10.2139/ssrn.228898

Ilan Goldfajn (Contact Author)

Gávea Investimentos ( email )

Rua Dias Ferreira, 190 7th andar
22431-050 Rio de Janeiro
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Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

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Rio de Janeiro, RJ 22453
Brazil

Central Bank of Brazil ( email )

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Brasilia DF 70074-900, Distr. Federal 70074-900
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61-2260767 (Fax)

Gino Olivares

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil
55-11-4504-2420 (Phone)

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) ( email )

Rua Marquas de Sao Vicente, 225
RJ 22453-900 Rio de Janeiro, 22453-900
Brazil

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