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Dollarization: asymmetry and breaks

ABSTRACT This paper examines the role of asymmetry and breaks in the dollarization-exchange rate nexus. The paper considers how countries respond differently to changes in macroeconomic fundamentals (exchange rate dynamics), which is contrary to theoretical argument. The study’s estimation is based on both symmetric (linear) ARDL and asymmetric (nonlinear) NARDL models. We also account for multiple structural breaks, which are determined endogenously and also included in the (N)ARDL models. Indeed, we found that there is a short-run asymmetric effect of dollarization in Sierra Leone, South Africa, and Burundi. In the case of Ghana, we found a symmetric effect. However, when breaks are accounted for, asymmetry became evident in both the short- and long-run. These results are sensitive to changes in data frequency and the inclusion of various control variables. Policy implications are considered based on the obtained results.