Exchange Rate and Inflation Dynamics in Dollarized Economies

Universidad de Navarra Working Paper No. 10/04

41 Pages Posted: 14 Jun 2004

See all articles by Luis Carranza

Luis Carranza

University of Navarra

Jose E. Galdon-Sanchez

Universidad Publica de Navarra ; IZA

Javier Gómez Biscarri

Universitat Pompeu Fabra; Barcelona Graduate School of Economics (Barcelona GSE)

Date Written: June 10, 2004

Abstract

Is the degree of dollarization important to determine the pass-through between nominal exchange rate depreciation and inflation? The common view in the literature is that countries with higher dollarization exhibit higher pass-through coefficients. In our study we qualify this common view. Using a sample of fifteen emerging-market countries with different degrees of dollarization, we find that the pass-through in highly dollarized economies is indeed higher, but it also tends to be more asymmetric than in economies with a lower degree of dollarization: We define asymmetric pass-through as the presence of a negative pass-through coefficient during economic downturns. The reason for this asymmetry is the negative balance-sheet effect that can dominate the positive competition effect generated by real exchange rate depreciations.

Keywords: Pass-through, dollarization, balance-sheet effect

JEL Classification: F31, F33

Suggested Citation

Carranza, Luis and Galdon-Sanchez, Jose E. and Gómez Biscarri, Javier, Exchange Rate and Inflation Dynamics in Dollarized Economies (June 10, 2004). Universidad de Navarra Working Paper No. 10/04, Available at SSRN: https://ssrn.com/abstract=556354 or http://dx.doi.org/10.2139/ssrn.556354

Luis Carranza

University of Navarra ( email )

School of Business and Economics
Campus Universitario
Pamplona 31080, Navarra
Spain
+34948425625 (Phone)
+34948425626 (Fax)

Jose E. Galdon-Sanchez (Contact Author)

Universidad Publica de Navarra ( email )

Department of Economics
Campus de Arrosadia
Pamplona, Navarra 31006
Spain
+34 948 16 9338 (Phone)
+34 948 16 97 21 (Fax)

HOME PAGE: http://www.econ.unavarra.es/~galdon/

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Javier Gómez Biscarri

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain