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Dollarization and the inflation threshold

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Author Info
Gaetano Antinolfi
Claudia M. Landeo
Maxim Nikitin

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Abstract

Empirical evidence suggests non-linearity in the impact of inflation on financial intermediation and real activity. Evidence also suggests that high inflation affects financial intermediation through the substitution of dollars `under the mattress' for savings in domestic banks. We model an economy where inflation and real activity are positively related at low levels of inflation. However, when the inflation rate exceeds a threshold, agents substitute dollars for deposits issued by domestic banks, reducing the scale of financial intermediation and investment. As a consequence, at high levels of inflation, capital stock and output become negatively related to the inflation rate.

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File URL: http://economics.ca/cgi/xms?jab=v40n2/CJEv40n2p0628.pdf
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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 40 (2007)
Issue (Month): 2 (May)
Pages: 628-649
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Handle: RePEc:cje:issued:v:40:y:2007:i:2:p:628-649

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Find related papers by JEL classification:
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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This page was last updated on 2009-11-25.

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