Essays in Applied Macroeconomics: Evidence on the Effects of Remittances and Dollarization in El Salvador

This dissertation examines key macroeconomic dynamics in El Salvador, focusing on the impacts of remittances and dollarization. The first chapter investigates the potential Dutch Disease effect in El Salvador, where remittances constitute a significant share of GDP. Using Structural Vector Autoregression (SVAR) and Local Projection (LP) methods, the study analyzes how remittance inflows influence the tradable sector. The findings indicate that the Tradable-to-Non-Tradable (TNT) and Agricultural-to-Non-Tradable (ANT) ratios remain largely unchanged, while the Manufacturing-to-Non-Tradable (MNT) ratio increases, pointing to a Dutch Disease effect in manufacturing. These results offer new insights into how remittances reshape sectoral composition in small, open economies. The second chapter explores the macroeconomic consequences of El Salvador’s full dollarization in 2001, particularly its effects on inflation, real GDP growth, and business cycle synchronization with the United States. Employing Autoregressive Moving Average (ARMA) models and impulse response functions, the study finds a notable reduction in inflation post-dollarization. However, contrary to theoretical expectations, business cycle synchronization with the U.S. appears to have weakened. These findings highlight the tradeoffs of dollarization, providing an applied perspective on its implications for macroeconomic stability in El Salvador. This research contributes to the broader literature on remittances, Dutch Disease, and dollarization, providing empirical evidence on how these economic forces shape the structure and stability of a highly remittance-dependent, dollarized economy.