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

Ross J. Hallren

U.S. International Trade Commission

Date Written: July 29, 2014

Abstract

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

Hallren, Ross J., The Impact of Dollarization and Currency Boards on Income and Inflation: A Synthetic Control Analysis (July 29, 2014). Available at SSRN: https://ssrn.com/abstract=2486253 or http://dx.doi.org/10.2139/ssrn.2486253

Ross James Hallren (Contact Author)

U.S. International Trade Commission ( email )

500 E St SW
Washington, DC 20436
United States

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