Integrating Complex Derivative Models in Understanding Dollarization’s Impact on Sustainable Development Goals and Environmental Economics: A Neo-Classical Finance Perspective

Abstract

Dollarization has major implications for sustainable development and environmental economics in developing countries. This paper integrates complex derivative models from neoclassical finance theory, including stochastic volatility, copula, and regime-switching models, to quantitatively analyze the impacts of dollarization. The models examine effects on poverty, inequality, economic growth, natural capital investment, and green bond financing access related to sustainable development goals and environmental economics. Despite limitations in assumptions, the models provide useful risk quantification. Results suggest dollarization exacerbates volatility and negative externalities, hindering sustainability objectives. The integration of derivative modeling and development economics provides an analytical framework for examining dollarization, indicating potential gains from gradual de-dollarization policies. Further empirical research is warranted to validate the theoretical insights.