Dollarization and Monetary Reform. Evidence from the Cochabamba Region of Bolivia

Abstract

Using data on informal market loans in the Cochabamba region of Bolivia, we test the hypothesis that monetary reform in the 1985-87 period resulted in a dedollarization of the economy. A theoretical model of the loan market suggests variables to be examined in the empirical analysis. A PROBIT model of the probability of dollar-denominated loans is estimated as a function of Bolivian inflation, exchange-rate depreciation, and exchange-rate volatility. In addition, policy reforms are modeled with dummy variables that switch on at the date of the reforms. In addition to the PROBIT estimates, we aggregate monthly average time series data for the informal market and investigate the hypotheses studied in this alternative data set. The evidence from the informal loan market suggests that the Bolivian stabilization plan was associated with an increase in dollarization rather than a decrease. Several possible reasons for this result are discussed, including a lack of credibility of the announced plan.