Growth and inflation tradeoffs of dollarization: Meta-analysis evidence

Abstract

We examine 585 estimates for macroeconomic effects of dollarization reported in 43 studies, codify 39 aspects of study design that may influence the estimates, and use Bayesian model averaging to take into account model uncertainty in meta-analysis. The results indicate that dollarized countries on average display slower and more volatile output growth, and a lower inflation rate than non-dollarized countries, but the estimates vary widely both within and across studies. Fully dollarized countries on average exhibit slower growth than non-dollarized and partially dollarized economies. Dollarization measurement, empirical method selection and authors’ affiliation systematically affect reported dollarization effects. The empirical results also suggest that limited control over foreign currency’s money supply in dollarized economies reduces the central banks’ ability to effectively conduct monetary policy and adjust to macroeconomic shocks.