Abstract:  Argentina became highly "dollarized" during its hyperinflations of 1989 and early 1990. Although inflation has returned to very low rates, a high degree of dollarization has persisted during the early 1990s, counter to what the currency substitution hypothesis predicts. This paper provides new evidence that explains the continued dollarization of the Argentine economy.
First, we develop a new measure of dollar currency circulating in foreign countries. This measure improves our ability to analyze dollarization and currency substitution by distinguishing between dollar currency holdings and dollar deposits, and thereby represents an important advance over previous studies that focused on dollar deposit holdings only. Empirically, these components of dollar assets for Argentina have responded differently to recent macroeconomic shocks.
Second, cointegration analysis of peso money demand in Argentina finds a negative "ratchet effect" from inflation on the demand for pesos. The reduction in peso money demand attributable to the ratchet effect is similar in magnitude to the estimated stock of all dollar assets held domestically by Argentine residents, consistent with the hypothesis of irreversible dollarization.
Full paper(685 KB PDF)
Home | IFDPs | List of 1993 IFDPs
Accessibility | Contact Us
Last update: October 16, 2008