Reassessing the feasibility of adopting dollarization in Latin America


  • León Padilla Universidad de las Américas, Quito, Ecuador


Dollarization, Monetary unions, Latin America, Venezuela, Argentina, SVAR



This paper analyses the possibility of Latin America's (LA) major economies adopting dollarization, considering that in the last decade macroeconomic instability has once again challenged the ability of certain economies to properly manage their own currency.


To determine the feasibility of adopting the US dollar as official currency, the author uses the framework of optimum currency area (OCA) theory, since, in fact, dollarization is an incomplete monetary union. The author uses a structural vector autoregressive (SVAR) model to identify what type of structural shock — country-specific, regional or global — prevails in LA economies. For this purpose, the US output is used to represent the global output and determine how the shocks of the US influence the output trajectory of each LA nation. The higher the influence of the US product, the lower the costs of adopting the US dollar.


The results of the variance decomposition show that the influence of the US shocks in the gross domestic product (GDP) trajectory of LA countries has significantly decreased over the last two decades, even in the currently dollarized economies. The estimates for Venezuela and Argentina show that the importance of US shocks in the trajectory of their GDP is low. Therefore, the cost of adopting the US dollar as the official currency would be high.


In view of hyperinflation and macroeconomic imbalances in certain LA nations, the dollarization debate has resurfaced in recent years. However, the literature that empirically evaluates the feasibility of adopting dollarization as a monetary system under current economic conditions is limited.



Download data is not yet available.


Alesina, A., Barro, R. and Tenreyro, S. (2002), Optimal Currency Areas, National Bureau of Economic Research Working Paper Series, Cambridge, MA, Vol. 9072, doi: 10.3386/w9072.

Bayoumi, T. and Eichengreen, B. (1993), One Money or Many? On Analyzing the Prospects for Monetary Unification in Various Parts of the World, University of California at Berkeley, Center for International and Development Economics Research, (CIDER) Working Papers, doi: 10.22004/ag.econ.233213.

Bird, G. (2004), in Bird, G. (Ed.), Is Dollarisation a Viable Option for Latin America? BT - International Finance and the Developing Economies, Palgrave Macmillan, London, pp. 51-59.

Blanchard, O.J. and Quah, D. (1989), “The dynamic effects of aggregate demand and supply disturbances”, The American Economic Review, American Economic Association, Vol. 79 No. 4, pp. 655-673.

Calvo, G. (2001a), “Capital markets and the exchange rate, with special reference to the dollarization debate in Latin America”, Journal of Money, Credit and Banking, Vol. 33, pp. 312-334.

Calvo, G. (2001b), “Capital markets and the exchange rate, with special reference to the dollarization debate in Latin America”, Journal of Money, Credit and Banking, Vol. 33, pp. 312-334.

Calvo, G.A. and Mishkin, F.S. (2003), “The mirage of exchange rate regimes for emerging market countries”, Journal of Economic Perspectives, Vol. 17 No. 4, pp. 99-118.

Calvo, G. and Vegh, C. (1992), “Currency substitution in developing countries: an introduction currency substitution in developing countries: an introduction”, Revista de Análisis Económico (RAE), Vol. 92, doi: 10.5089/9781451845884.001.

Canh, N.P., Schinckus, C., Su, T.D. and Chong, F.H.L. (2021), “Institutional quality and risk in the banking system”, Journal of Economics, Finance and Administrative Science, Emerald Publishing, Vol. 26 No. 51, pp. 22-40.

Canova, F. (2005), The Transmission of US Shocks to Latin America, Vol. 251, pp. 229-251.

Chow, H.K. and Kim, Y. (2003), “A common currency peg in East Asia? Perspectives from western Europe”, Journal of Macroeconomics, Vol. 25 No. 3, pp. 331-350.

De Grauwe, P. (2012), The Economics of Monetary Union, 9th ed., Oxford University Press, Oxford.

De Grauwe, P. and Mongelli, F. (2005), “Endogeneities of optimum currency areas: what brings countries sharing a single currency closer together?”, SSRN Electronic Journal, Working Paper Series No 468, doi: 10.2139/ssrn.691864.

Dornbusch, R. (2001), “Fewer monies, better monies”, The American Economic Review American Economic Association, Vol. 91 No. 2, pp. 238-242.

Edwards, S. (2011), “Exchange-rate policies in emerging countries: eleven empirical regularities from Latin America and East Asia”, Open Economies Review, Vol. 22, p. 533.

Edwards, S. and Magendzo, I. (2003), “A currency of one's own? An empirical investigation on dollarization and independent currency unions”, Vol. 9514, NBER Working Paper, doi: 10.3386/w9514.

Edwards, S. and Magendzo, I. (2006), “Strict dollarization and economic performance: an empirical investigation”, Journal of Money, Credit and Banking, Vol. 38, pp. 269-282.

Engle, R.F., Granger, C.W.J. and Grangeri, C.W.J. (1987), “Co-integration and error correction: representation, estimation, and testing”, Econometrica, Vol. 55 No. 2, pp. 251-276, doi: 10.2307/1913236.

Frankel, J.A. (1999), No Single Currency Regime is Right for All Countries or At All Times, National Bureau of Economic Research, Working Paper Series, Vol. 7338, doi: 10.3386/w7338.

Frankel, J.A. and Rose, A.K. (1997), “Is EMU more justifiable ex post than ex ante?”, European Economic Review, Vol. 41 Nos 3-5, pp. 753-760.

Frankel, J.A. and Rose, A.K. (2001), “The endogenity of the optimum currency area Criteria”, The Economic Journal, Vol. 108 No. 449, pp. 1009-1025.

Gong, C. and Kim, S. (2018), “Regional business cycle synchronization in emerging and developing countries: regional or global integration? Trade or financial integration?”, Journal of International Money and Finance, Vol. 84, pp. 42-57.

Hochreiter, E. and Siklos, P.L. (2002), “Alternative exchange-rate regimes: the options for Latin America”, North American Journal of Economics and Finance, Vol. 13 No. 3, pp. 195-211.

Hochreiter, E., Schmidt-Hebbel, K. and Winckler, G. (2002), “Monetary union: european lessons, Latin American prospects”, North American Journal of Economics and Finance, Vol. 13 No. 3, pp. 297-321.

Hou, Y. (2019), “Latin American growth and exports to China*”, International Economic Journal, Vol. 33 No. 3, pp. 537-559.

Kandil, M. (2009), “Spillover effects of US business cycles on Latin America and the Caribbean”, Journal of Economic Issues, Vol. 43 No. 4, pp. 971-996.

King, R., Plosser, C., Stock, J. and Watson, M. (1987), “Stochastic trends and economic fluctuations”, The American Economic Review. doi: 10.3386/w2229.

Krugman, P. (1991), Geography and Trade, MIT Press, Cambridge.

Larrain, F. and Tavares, J. (2003), “Regional currencies versus dollarization: options for Asia and the Americas”, Journal of Policy Reform, Vol. 6, pp. 35-49.

Levy-Yeyati, E. and Sturzenegger, F. (2002), Dollarization: Debates and Policy Alternatives, MIT Press.

Mengesha, L. and Holmes, M. (2013), “Does dollarization Alleviate or Aggravate exchange rate volatility?”, Journal of Development of Economics, Vol. 38 No. 2, pp. 99-118.

Mengesha, L.G. and Holmes, M.J. (2015), “Does dollarization reduce or produce inflation?”, Journal of Economic Studies, Emerald Group, Vol. 42No. 3, pp. 358-376.

Miles, W. (2017), “The impact of the US on Latin American business cycles: a new approach”, Economic Systems, Vol. 41 No. 2, pp. 320-331.

Padilla, L. and Rodríguez García-Brazales, Á. (2021), “Can South America form an optimal monetary area? A structural vector autoregression analysis”, International Economics and Economic Policy, Vol. 18 No. 2, pp. 309-329.

Prock, J., Soydemir, G.A. and Abugri, B.A. (2003), “Currency substitution: evidence from Latin America”, Journal of Policy Modeling, Vol. 25 No. 4, pp. 415-430.

Regmi, K., Nikolsko-Rzhevskyy, A. and Thornton, R. (2015), “To be or not to be: an optimum currency area for South Asia?”, Journal of Policy Modeling, The Society for Policy Modeling, Vol. 37 No. 6, pp. 930-944.

Schmitt-Grohé, S. and Uribe, M. (2001), “Stabilization policy and the costs of dollarization”, Journal of Money, Credit and Banking, Vol. 33, pp. 482-509.

Urdaneta, A., Borgucci, E., Morán, G. and Farinango, R. (2019), “Dollarization of the Venezuelan economy from a money demand approach | Dolarización de la economía venezolana desde el enfoque de la demanda de dinero”, Revista de Ciencias Sociales, Vol. 25 No. 1, pp. 114-129.

Vernengo, M. (2006), Monetary Integration and Dollarization: No Panacea, Monetary Integration and Dollarization: No Panacea.

Zhao, X. and Kim, Y. (2009), “Is the CFA Franc Zone an optimum currency area?”, World Development, Elsevier, Vol. 37 No. 12, pp. 1877-1886.




How to Cite

Padilla, L. (2022). Reassessing the feasibility of adopting dollarization in Latin America. Journal of Economics, Finance and Administrative Science, 27(53), 34–51. Retrieved from