The phenomenon of dollarization in Latin America and the Caribbean

Abstract

This work investigates the impact of the phenomenon of dollarization in Latin America and the Caribbean. Firstly, there is a broad economic overview of the Latin-American continent and a focus on financial integration with its related potential benefits and costs, in particular after the adoption of more liberal policies in the ’80s - ‘90s in developing countries. Secondly, one of the most interesting characteristics of globalisation during the last thirty years has been the phenomenon of dollarization that is the domestic use of a foreign currency, the U.S. dollars in this case, in many developing economies. It appears to be more intrinsic in Latin America between 1990 and 2000 than in other parts of the world because it has been demonstrated that where inflation is high, dollarization allows an economy to retain more monetary depth than it otherwise would. However, this cannot be a feasible solution for countries that struggle for a macroeconomic stability. Indeed, there is an in-depth research of the main scientific articles and a review of the theoretical and empirical findings drawn from the literature that allow to illustrate the main concepts and theories behind the phenomenon of dollarization. Afterwards, the last part is dedicated to the explanation and collection of the most relevant data linked to dollarization to investigate their impact on some of the most significant Latin American countries; this is followed by a quantitative analysis in order to give an economic interpretation of the obtained results. Finally, I will include some policy recommendations related to the situation of Latin American countries.