Date of Award

Spring 6-4-2023

Document Type

Thesis (Undergraduate)

Department

Quantitative Social Science

First Advisor

Andrew Levin

Abstract

This paper examines full dollarization in Latin America and the experience of El Salvador, Panama and Ecuador using the U.S. Dollar as their sole currency. This is accomplished by comparing key macroeconomic indicators in these countries to both their pre-dollarization experience and a control group of the largest economies in the region from 1986 to 2019. Special attention is paid to the comparison between El Salvador which fully dollarized and Guatemala which partially dollarized in 2001. A gravity model using a difference in differences analysis found no significant increase in bilateral trade with the United States relative to the control group for El Salvador and Guatemala. This contrasted with previous literature on currency unions and optimal currency areas that predicted an increase in trade among countries that shared a common currency. The model did predict a 30 percent increase in Ecuador’s trade with the United States following dollarization, however, Ecuador dollarized in a crisis making causality difficult. An additional gravity model of full world bilateral connections was also run. This model predicted a 15 percent increase in El Salvador’s world trade (not with the U.S.) compared to the control group and pre dollarization period. In addition, comparison of means T test and F tests for volatility found statistically significant drops in inflation rates and lending rates of both Ecuador and El Salvador following dollarization. In addition, their post-dollarization inflation rate levels were lower than the comparison group in line with previous literature.

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