Dollarization or Monetary Independence? Evidence from Venezuela

• Published in: Asian journal of Latin American studies Vol. 32; no. 4; pp. 53 - 71
• Main Authors: Alberto Jose Hurtado Briceno, Sadcidi Zerpa de Hurtado, Jose U. Mora Mora
• Format: Journal Article
• Language: English
• Published: 한국라틴아메리카학회 01.11.2019
• Subjects: 지역학; price stability; dollarization; inflation; monetary policy; exchange rate regime
• ISSN: 1229-0998; 2287-920X
• DOI: 10.22945/ajlas.2019.32.4.53

In the theoretical debate about the benefits of rigid exchange rate regimes, dollarization stands out as a strictly fixed scheme that is used to recover the confidence in the local monetary authority, allow the reduction of inflation, and achieve price stability in countries that adopt it. Venezuela, having monetary authorities with high inflationary bias and being in a phase of instability and volatility of its productive activity, is a good candidate for dollarizing its economy. Given this possibility, this paper identifies whether dollarization is the monetary-exchange regime that currently best suits the Venezuelan economy. We perform an empirical analysis of the costs and benefits of replacing the Bolívar with the U.S. dollar. The empirical evidence tells us that dollarization in Venezuela is undesirable because the benefits in terms of economic growth and low inflation might be limited due to the high costs derived from the low correlation between macroeconomic aggregates of both countries. KCI Citation Count: 0