Research On The Driving Factors Of Dollarization In Latin American Countries

In the context of economic globalization,the phenomenon of currency substitution has become increasingly common,especially for some small-scale and highly open Latin American countries,which are more likely to experience the phenomenon of partial or complete substitution of their currency by the US dollar,known as "dollarization".Based on the degree of dollarization,Latin American countries can be divided into two categories: full dollarization and partial dollarization.Although dollarization can bring benefits such as exchange rate stability,lower inflation,financial discipline,attracting foreign capital,and increasing trade volume in the short term,it also comes with costs such as loss of independent monetary policy,loss of seigniorage,and loss of ultimate lender,which pose a threat to the financial stability of the country.The study of dollarization in Latin America is not a new topic,but it has become increasingly prominent in recent years,especially against the backdrop of countries reducing their holdings of US assets,continuous decline in US credit,and decline in the global status of the US dollar,as well as the objective fact that GDP in the Latin American region has been continuously declining since 2013.Therefore,the decision of Latin American countries regarding dollarization also needs to be weighed and adjusted according to the current situation and interests.This article believes that dollarization should be seen as a temporary expedient in specific circumstances rather than a long-term economic policy.Therefore,this article aims to understand the problem of dollarization from the root cause through theoretical analysis and empirical research on the driving factors of dollarization in Latin American countries.Countries should re-examine their own economic development and monetary policies,and actively explore suitable reserve currencies and international trade methods to achieve stable and sustainable economic growth.The empirical research of this article selected quarterly data from five Latin American countries from 2000 to 2021,and analyzed the driving factors of dollarization from static and dynamic levels through the establishment of LSDV and PVAR models.The research concluded that macroeconomic factors,domestic interest rates,exchange rate index,total foreign trade volume,and inflation rate are significant driving factors of dollarization in Latin American countries.Through impulse response analysis,it was concluded that the degree of dollarization is negatively correlated with macroeconomic factors,domestic currency holding costs,exchange rate index,and total foreign trade volume,while positively correlated with inflation index.Through variance decomposition,it was found that inflation rate and exchange rate index are the main driving factors of dollarization,followed by total trade volume and domestic interest rates,while the impact of macroeconomic factors on dollarization is relatively weak.