DOLLARIZATION: A SURVEY
Introduction
The main motivation for studying dollarization and its consequences is the increased interest in the subject among developing countries, especially in Latin America, since 1999, when Argentina's president Carlos Menem proposed to eliminate the country's peso and replace it with the US dollarization was presented as the solution to the country's problems after having plunged into a severe recession under a convertibility system.
Reasons for a Country to Dollarize
- Optimum Currency Areas and Modern Criteria
- Economic Vulnerability
- The Limited Exchange Rate Regime Options
Larrain and Velasco (2001) themselves indicate that country conditions are also relevant for the choice of the exchange rate regime. Continuous depreciations of the exchange rate by the authorities create expectations among the public, making monetary policy ineffective.
Recent Empirical Developments
According to the authors, if the production structure in Mexico is sufficiently dependent on intermediate inputs imported from the US, the optimal interest rate for Mexico should be higher than that of the US. The second reason is that although Mexico is considered an open and small economy. relative to the US, the model still allows Mexico to control its terms of trade.
What to Expect with Dollarization
- Immediate Consequences
- Dollarization Effects in the Long Run
- Devaluation Risk and Country Risk
- Overall Performance
- Integration with the Anchor Country
This makes dollarization one of the extremes in the list of available exchange rate regimes, with the opposite extreme being free-floating. According to Frankel and Rose (1998), a dollarized country can benefit from what they call the "endogeneity" of the OCA criteria.
Conclusion
Part B of Table 3.3 shows for each city the average dispersion, si,t, of the relative price distributions of commodities for the same periods. Panama's real exchange rate appears to increase the nonstationarity of the series as a whole. Inflation performance also does not seem to matter for the long-term behavior of the real exchange rate.
For both, the average growth rate of the real exchange rate is negative for the period 1950-2000 according to table 4.2. Only the latter can provide a satisfactory explanation for the dynamics of the relative price level over time. According to equation (4.23) the growth of the real exchange rate (or we can say the relative price level) between country i and the USA.
DOLLARIZATION AND PRICE DYNAMICS
Introduction…
In one of the boldest moves in recent history, the government of Ecuador adopted the dollar as its official currency in January 2000. However, one key difference is the rapid recovery of relative prices and the stability of the price level and inflation after the crisis and recovery, which appears to be due to the move to dollarization. A new feature of the analysis is the use of data at the level of individual goods in 12 major cities within Ecuador, as well as the more conventional CPI data.
Micro-data allows price level comparisons in Ecuador with the US. They also allow a study of the impact of currency fluctuations and regimes on the distribution of prices among goods among Ecuadorian cities and in relation to the US in particular, the importance of the trend Breaks have been explored for these issues where the break dates correspond to the start and end of the currency crisis and the beginning of the new price equilibrium.
The Data
- Descriptive Statistics for the Aggregate
- Descriptive Statistics for the Micro-
- Descriptive Statistics for the Micro-
Furthermore, the relative price of the average commodity is calculated as the simple average of the series of 23 qj,t. 46 The behavior of the RER was also affected by the deep recession and the resulting unemployment. Note: Volatility is measured as the standard deviation of the growth series of each variable.
Panel A in Figure 3.4 shows the mean and standard deviation for the 11 qi,t city series. Note: The series in panel A are the simple mean and standard deviation of the relative price level series for the 11 cities other than Quito. Mean and Standard Deviation of City Relative Prices and City Average Spread Series of Relative Commodity Prices (Jan 97-Apr 03).
Trends and Fluctuations in Real Exchange Rates
- The Econometric Models
- The Three Structural Break Dates
- Results of the Unit Root Tests With and
As indicated above, the delineation of regimes is likely to be exogenous to the data generation process of the relative price series. The Maddala-Wu test consists in first obtaining the p-values for the t-statistics of the coefficients α estimated with the univariate unit-root tests for the individual commodity relative price series. This month marks the end of the currency crisis and the relative price decline and the beginning of the relative price recovery.
For comparison, Table 3.4 also includes the results of the univariate tests applied to the CPI-based RER. If the fault lines are not taken into account, the null hypothesis of a unit root is rejected by a rate greater than 10% for only 6 of the 24 commodity sets. On the other hand, if the fractions are taken into account, a root of unity can be rejected for 16 of the 24 commodities.
Price Integration in Ecuador under Dollarization
- Inter-City Price Gap Reductions
- Price Integration Analysis
- Price Integration Analysis Results
According to Table 4.3, both the price level and the level of real GDP per capita of the Latin American countries are on average below the US. During the subperiod, only Venezuela has a price level above the US price level. Considering the price level, both Panama and the average Latin American country show signs of divergence compared to the US.
According to equation (4.14), if the rates of growth of the relative price of non-tradable goods compared to tradable goods in country i and part B of the US Table 4.9 show the same statistics for the relative price levels of the countries with respect to the US, calculated using the sets obtained by Eqs. (4.24) and (4.25). In fact, for both Panama and the average Latin American country, the average annual rate of real exchange rate depreciation for the period 1950–2000 is about the same.
DOLLARIZATION AND PRICE DYNAMICS
Long-Run Economic Performance of
Statistics are based on annual data for all variables except US stocks, for which data are every 5 years. The situation is different in the sub-period with an overall poor performance of Latin American countries. The average inflation of a Latin American country was 39.36% per year, much higher than the US's 4.99%.
In fact, no Latin American country outperformed the US, and some countries such as Peru and Venezuela even experienced negative average growth. It is important to note that Panama's real GDP per capita growth is similar to that of the average Latin American country in both mean and standard deviation (Compare mean=1.43% and std=4.80% for Panama with .mean=1.11% and std=4.43% for the average Latin American country.) However, in terms of inflation and price volatility, Panama is an outlier, with an average annual inflation of only 3.29% (less than the U.S. ) and a standard deviation of 3.72%. . According to this table, most of the trade of Latin American countries in 1960 was with the US.
Statistics on the Relative Price and
Note: (***) Three asterisks indicate rejection of the null hypothesis of zero mean growth for the real exchange rate at the 1% significance level. All tests use Newey-West HAC standard errors due to the possible existence of serial correlation in the real exchange rate series. The "average level" of relative prices shows a downward trend throughout the period. Real "average" real GDP per capita remains roughly unchanged during the first half of the period and shows a clear downward trend only during the second half.
In this subperiod, the average relative price level across countries is -0.467, meaning that the Latin American price level is only 62.68% of the US on average. This long-term depreciation of the average relative price is accompanied by a relatively flat trend in relative real GDP per capita. per capita in the Latin American countries in the sub-period with a growth of only 0.144%. In both periods, no Latin American country has a level of real GDP per per capita over the United States.
Latin America and Long-Run Purchasing Power Parity
- Long-Run Purchasing Power Parity Econometrics
- Long-Run Purchasing Power Parity Test Results
- Long-Run PPP, Country Characteristics, and
ADF tests will be performed independently on the real exchange rate series of each of the Latin American countries, using the longest period available, i.e. for the ADF tests the table also shows the value of the implied autoregressive coefficient, ρi. The sign of the intercepts implies a negative average growth rate of the bilateral real exchange rate across the country.
According to Table 4.2, all countries except Mexico, Peru and Uruguay actually have a negative average growth of the real exchange rate. The results of the PPP tests shown in this section indicate that the real exchange rate range of the average Latin American country also has a statistically significant tendency to depreciate, but this is a long-run trend. On the other hand, for Panama, the short-term behavior of the real exchange rate is very consistent with that of the long-term.
Relative Price Level Divergence in the Long Run
- Alternative Explanations for Price Level
- Long-Run Relative Price Level Movements
- Results for the Long-Run Relative Price
To examine the robustness of the results obtained through the cross-sectional estimations of equation (4.20), the relationship between relative price and relative income is also examined using time series regression for the sub-periods 1950-1971 and. Regarding the robustness check, Table 4.7 shows for each country the results of the time series OLS regressions of relative price level on relative income level, according to equation (4.20), and the results of ADF unit root tests on these regressions' . In Table 4.7, the low values of the Durbin-Watson (DW) statistic in all the regressions (most of them less than 1) are indicative of the relative non-stationarity.
Therefore, the results of the ADF unit root tests in Table 4.7 seem to support that countries' relative price and relative income levels are cointegrated in each subperiod. In continuation of the robustness check of the time series, table 4.8 shows the results of estimating short-term ECM relationships between the countries' relative price and relative income series. Consistent with the results of the cross-sectional analysis, the time-series analysis results also suggest that the Panama observation is not influential.
Balassa-Samuelson, Non-Tradables and Tradables
If the error correction terms for all countries are obtained by using the same coefficients for equation (4.20) instead of country-specific coefficients, the results in Table 4.8 change only slightly and the conclusions of the analysis remain the same. The EIU provides annual domestic prices for 109 commodities, of which 24 are classified as non-tradable and 85 as tradable, for the capital cities of the 13 Latin American countries analyzed in this study and for Pittsburgh, USA. Price levels are averages of log prices in dollars of a set of goods from the Economist Intelligence Unit (EIU).
Finally, for both the US, the average growth rate of the price of non-tradable goods is greater than that of tradable goods. Regarding the average Latin American country, no clear effect can be observed due to the high volatility of growth values. According to the Balassa-Samuelson hypothesis, the declining trend of the relative price of non-tradable goods and the resulting declining trend of the real exchange rate is an indication that productivity growth in the production of tradable goods is faster in the US.
Conclusion…
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LIST OF THE 109 COMMODITIES FROM THE
