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Exchange Rate Pass-through and Partial Dollarization: Is There a Link?

Exchange Rate Pass-through and Partial Dollarization: Is There a Link?

Chapter:
(p.79) 2 Exchange Rate Pass-through and Partial Dollarization: Is There a Link?
Source:
Latin American Macroeconomic Reforms
Author(s):
José Antonio González
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226302683.003.0003

This chapter examines how dollarization affects the transmission channel of nominal exchange rate fluctuations into domestic inflation for thirteen countries in Latin America between 1980 and 2000. It finds no relationship between the level of dollarization and the degree of pass-through of the nominal exchange rate into domestic inflation. A higher degree of dollarization between countries does not lead to higher pass-through. Therefore, more dollarized economies do not necessarily have less ability to influence their real exchange rates through nominal exchange rate movements. Within the same country, an increase in dollarization does not hinder a country's ability to adjust its exchange rate through nominal fluctuations. Higher dollarization does not necessarily mean higher dollar-indexation, as is commonly believed. The price index is not determined by the unit of accounting but by internal market conditions.

Keywords:   dollarization, nominal exchange rates, domestic inflation, Latin America

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