Dollarization and Trade Through the Lens of History
39 Pages Posted: 6 Aug 2018
Date Written: April 6, 2018
This paper makes a comparison between official dollarization and the classic gold standard by studying the effects of both on trade. Under this scheme, I have been able to assess the cases of Ecuador and El Salvador: two contemporary examples of official dollarization. In the case of Ecuador, it happened in 2000 after a financial crisis and for El Salvador it occurred when the country was under stable macroeconomic conditions in 2001. One of the benefits of the classic gold standard was its effects on trade, the same happening with official dollarization. Through a synthetic control analysis, I show the benefits of official dollarization in trade under the common currency framework. Results for Ecuador show that official dollarization has increase bilateral trade with the US by 43% over 14 years. Results for El Salvador show an increase of bilateral trade with the US of 76% over 13 years. What drives this difference? During the classic gold standard period (1870-1914) different monetary unions were formed having diverse effects on trade. One reason for this may be business cycle coordination among members while another could be structural reforms prior to adopting the system along with institutions, these lessons may be extrapolated to dollarization.
Keywords: Dollarization, Gold Standard, Synthetic Control Group, Trade
JEL Classification: N00, N16, F45, F14
Suggested Citation: Suggested Citation