Implications of partial dollarization for the inflation-targeting regime: an analysis based on the literature on dollarization

This article examines the implications of partial dollarization for the adoption of an inflation-targeting regime (ITR) in highly dollarized economies (HDE) in Latin America, such as Peru and Bolivia. The research focuses on the economic policy challenges faced by these countries, particularly in a context of low inflation and high financial dollarization. It uses an analytical framework based on the literature on dollarization, highlighting different manifestations such as payment dollarization and real dollarization. Through a conceptual and empirical analysis, the study concludes that, although financial dollarization could hinder the effectiveness of monetary policy, it does not preclude the adoption of an ITR, provided that certain conditions of financial stability are met. It also emphasizes that dollarization should gradually decline under a successful RMI, which would enhance monetary independence. Finally, the study suggests that the transition to an RMI should be gradual and well-planned, with a focus on the strength of the financial system to mitigate exchange rate vulnerabilities. (Abstract and audio: Department of Economic Publications)