Official dollarization in El Salvador and the inflation–inflation uncertainty nexus

Abstract

This study extends the literature on the relationship between inflation and inflation uncertainty by examining the impact of official dollarization on inflation uncertainty in El Salvador. The ARIMA–GARCH model reveals that official dollarization significantly reduces the degree of volatility persistence in response to inflationary shocks. However, based on Granger causality tests, if inflation should increase there would be an increase in inflation uncertainty as suggested by the Friedman–Ball hypothesis.