The Effect of Inflation Targeting Policies on Dollarization-A Cross-Country Analysis

This paper attempts to review the experiences of various dollarized economies from the adoption of an explicit inflation-targeting framework for domestic monetary policy. Dollarization is the phenomenon where agents in a country choose to use a foreign currency instead of their domestic currency. This often occurs in response to episodes of high inflation rate in the domestic economy. Central Banks of these countries often respond by adopting an inflation-targeting regime. This paper attempts to evaluate the effectiveness of such a policy by conducting a cross-country comparison. A panel dataset from 14 dollarized economies from 2001-2015, is used to compare between dollarized economies that have adopted inflation targeting regimes versus those that have not. Inflation targeting seems to have had a higher impact in de-dollarization in Latin American economies followed by East-Asian economies