Exchange Rate and Inflation Dynamics in Dollarized Economies

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