DOLLARIZATION AND POLITICAL RISK: IS THERE A FORUM FOR DEBATE?

Propensity to dollarize in Latin America in the demand-side of some economies of the region has a strong political risk component which, in the past, was mainly carried out by inflationary pressures. Coping with risk meant holding FCDs. A recursive multilevel model is developed and empirically tested with Colombia’s data to stress a country-specific tendency to dollarize due to political risk. The chapter’s conclusions suggest that consideration of issues, policies and implications inherent to the decision to dollarize cannot ignore that, the solution to any government-enforced dilemma in the supply-side of these economies, is also politically motivated. Results of a survey are also provided.