The Impact of Dollarization and Currency Boards on Income and Inflation: A Synthetic Control Analysis
46 Pages Posted: 26 Aug 2014 Last revised: 27 Aug 2014
Date Written: July 29, 2014
We use the synthetic control method (SCM) to estimate the effect of official dollarization in Ecuador and quasi-dollarization, in the form of a currency board, in Argentina. We show that these monetary arrangements were effective at controlling inflation in these two countries. Interestingly, in contrast with previous research, we find these policies had no impact on real income. Despite the success of these policies, Argentina abandoned its currency board in 2002, devalued its currency, and repudiated much of its outstanding government debt causing renewed inflation and a loss of significant consumer wealth. Ecuador, conversely, continues to operate under dollarization, fourteen years after implementation. We discuss the roles of labor market adjustments and fiscal discipline as explanations for these divergent outcomes.
Keywords: Synthetic Counterfactuals; Dollarization; Currency Boards; Inflation; Real Income
JEL Classification: E42, E63, E31
Suggested Citation: Suggested Citation