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Dollarization and the inflation threshold

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Author Info

  • Gaetano Antinolfi
  • Claudia M. Landeo
  • Maxim Nikitin

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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Bibliographic 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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Cited by:
  1. Ghossoub, Edgar & Reed III, Robert R., 2010. "Liquidity risk, economic development, and the effects of monetary policy," European Economic Review, Elsevier, vol. 54(2), pages 252-268, February.
  2. Reed, Robert R. & Ghossoub, Edgar A., 2012. "The effects of monetary policy at different stages of economic development," Economics Letters, Elsevier, vol. 117(1), pages 138-141.

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