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Dollarization $ in emerging economies
AV
Positive? Negative?
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Steps towards dollarization
• First if the there is inflation, people start saving in dollars
• Second, country dollarizes economy
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Ecuador
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% of US $ savings in developing countries
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$ saving going up
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Currency risk before and after dolarization in Ecuador and El Salvador
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Inflation before and after dollarization in Ecuador and El Salvador
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Inflation before and after dollarization in Ecuador and El Salvador
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Ecuador macroeconomic and socioeconomic indicators before and after dollarization
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El Salvador macroeconomic and socioeconomic indicators before and after
dollarization
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Economic costs according to Cohen
Economic
1-loss of monetary policy, entirely dependant on other countries economy
2-No seigniorage (capacity to create money)
3-No more lending as last minute result.
Political
1-loss of identity. Loss of patrimony
2-insurance policy against risk
3-National currency independence is imperative when governments face the possibility of external dependence or threat
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Consequences of dollarization on El Salvador according
to Towers and Borzutky.
• The authors point out that El Salvador was not facing a crisis and most of the dollarization process was because of political pressures of ARENA, the main party.
• After the process no economical growth in El Salvador
• The poor the most affected• 1-Not a solid understanding of exchange rate• 2- Poor don’t have access to loans• 3-No change for poor people who are used to make small
purchases.
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Discussion
• Positive effects on economy, and especially helpful after or during an economic crisis. Visible
• Hard (from the data I gathered) to estimate exactly the political effects (symbolic loss, possibility of invasion, seigniorage)
• Hard to estimate the psychological effects or the effects of not enough change in a small purchase
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Cost Benefit Analysis
• Net Benefits = Net Benefits = Economic Benefits - Political, Economic and Sociological CostsEconomic Benefits - Political, Economic and Sociological Costs
• Economic Benefits lower inflation, financial integration-no transaction cost, more economic growth
• Economic Costs
• Political Costs • Political (symbolic loss + insurance against risk + loss of currency independence)
• Sociological Cost (lack of orientation on poor people + unfavorable small purchases)
•
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Conclusions
• More studies or more time to see the effects on both countries.
• Look in to a way to estimate political or socioeconomic costs and calibrate it against economic benefits and costs