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Title:How strong is the case for dollarization in Costa Rica? A note on the business cycle comovements with the United States PDF Logo
Authors:Lindenberg, Nannette
Westermann, Frank
Issue Date:2009
Series/Report no.:Working Paper, Institute of Empirical Economic Research, University of Osnabrück 79
Abstract:We evaluate the proposal for official dollarization in Costa Rica by applying a new approach to measure the business cycle comovements with the United States. While the literature often focuses on the correlation of shocks, we point out that the response of each country to the shocks is also an important aspect of stabilization policy. We analyze whether Costa Rica and the United States share a common synchronized response to shocks, i.e. a common business cycle, using the Engle and Kozicki (1993) and Cubadda (1999, 2007) serial correlation common features tests, in a quarterly GDP data set from 1991 to 2008. Although we find some tendency towards common AR(p) structures and common long run trends, we reject the hypothesis that the two countries share a common business cycle. Based on this evidence, we conclude that official dollarization in Costa Rica would impede the efforts of its stabilization policy, despite the relatively high contemporaneous correlation of shocks.
Subjects:dollarization
business cycle comovement
serial correlation common feature
Central America
Costa Rica
JEL:E32
F36
O54
Document Type:Working Paper
Appears in Collections:Working Papers, Institut für Empirische Wirtschaftsforschung, Universität Osnabrück

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