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Currency Substitution, Capital Flight and Real Exchange Rates

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  • Jorge M. Streb

Abstract

This paper focuses on a monetary explanation of real exchange rate fluctuations, namely capital flight provoked by the process of currency substitution. Under fixed exchange rates, capital inflows to reconstitute domestic money holdings produce a positive liquidity effect due to the creation of inside money by the financial system. This can initially lead to an exchange rate appreciation, through an increase in the price of nontradables, and a current account deficit. A process of deflation must then ensue to converge to the new steady state equilibrium.

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File URL: http://www.ucema.edu.ar/publicaciones/download/documentos/113.pdf
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Bibliographic Info

Paper provided by Universidad del CEMA in its series CEMA Working Papers: Serie Documentos de Trabajo. with number 113.

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Date of creation: Jul 1996
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Handle: RePEc:cem:doctra:113

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Keywords: exchange rate-based stabilizations; inside money;

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Cited by:
  1. Diego Nicolás Moccero, 2001. "Esquemas Cambiarios y Monetarios Alternativos en un Modelo de Interdependencia Macroeconómica entre Argentina y Brasil," Department of Economics, Working Papers 031, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
  2. Jorge M. Streb, 1998. "Y, si no hay más remedio... Inflación , Desconfianza y la Desintegración del Sistema Financiero en Argentina," CEMA Working Papers: Serie Documentos de Trabajo. 128, Universidad del CEMA.

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