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Dollarization and the conquest of hyperinflation in divided societies

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Author Info

  • Russell W. Cooper
  • Hubert Kempf.

Abstract

This study argues that the delegation of monetary policy control by one country to another can reduce inflation in the delegating country. Hyperinflation is common in a divided society, one in which special interest groups can pressure a weak central government to issue money to finance their own demands while neglecting the country’s overall welfare. A commitment device like dollarization or a currency board, which gives control of the divided country’s money supply to another country, can eliminate this inflation bias. This is illustrated by Argentina’s experience with inflation and a currency board which, in effect, gave control of Argentina’s money supply to the United States. This argument is made precise using a two-country overlapping generations model to study the effects of delegation. The study also finds that a dollarization treaty between the two countries can be welfare-improving for both

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Bibliographic Info

Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (2001)
Issue (Month): Sum ()
Pages: 3-12

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Handle: RePEc:fip:fedmqr:y:2001:i:sum:p:3-12:n:v.25no.3

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Related research

Keywords: Dollarization;

References

References listed on IDEAS
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  1. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  2. Zeljko Bogetic, 2000. "Official Dollarization: Current Experiences and Issues," Cato Journal, Cato Journal, Cato Institute, vol. 20(2), pages 179-213, Fall.
  3. Sebastian Edwards & Guido Tabellini, 1992. "Explaining Fiscal Policies and Inflation in Developing Countries," NBER Working Papers 3493, National Bureau of Economic Research, Inc.
  4. V. V. Chari & Patrick J. Kehoe, 1998. "On the need for fiscal constraints in a monetary union," Working Papers 589, Federal Reserve Bank of Minneapolis.
  5. Francois R. Velde & Marcelo Veracierto, 2000. "Dollarization in Argentina," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 24-37.
  6. Russell Cooper & Hubert Kempf, 1998. "Establishing a Monetary Union," Boston University - Institute for Economic Development 88, Boston University, Institute for Economic Development.
  7. Sebastian M. Saiegh & Mariano Tommasi, 1999. "Why is Argentina’s Fiscal Federalism so Inefficient? Entering the Labyrinth," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 169-209, May.
  8. Kareken, John & Wallace, Neil, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 207-22, May.
  9. Aizenman, Joshua, 1992. "Competitive Externalities and the Optimal Seigniorage," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(1), pages 61-71, February.
  10. Atish R. Ghosh & Anne-Marie Gulde & Holger C. Wolf, 2000. "Currency boards: More than a quick fix?," Economic Policy, CEPR & CES & MSH, vol. 15(31), pages 269-335, October.
  11. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Zimbabwe: how to beat hyperinflation
    by Economic Logician in Economic Logic on 2008-07-28 14:13:00
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