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Dollarization in Argentina

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  • Steven B. Kamin
  • Neil R. Ericsson

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.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 460.

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Date of creation: 1993
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Handle: RePEc:fip:fedgif:460

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Keywords: Argentina ; Money;

References

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  1. Melvin, Michael, 1988. "The Dollarization of Latin America as a Market-Enforced Monetary Reform: Evidence and Implications," Economic Development and Cultural Change, University of Chicago Press, vol. 36(3), pages 543-58, April.
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  19. Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992. "The Power of Cointegration Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 325-48, August.
  20. Federico Sturzenegger, 1992. "Inflation and Social Welfare in a Model With Endogenous Financial Adaptation," NBER Working Papers 4103, National Bureau of Economic Research, Inc.
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  23. Pablo Guidotti & Carlos A. Rodríguez, 1992. "Dollarization in Latin America: Gresham's Law in Reverse?," CEMA Working Papers: Serie Documentos de Trabajo. 81, Universidad del CEMA.
  24. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  25. Ortiz, Guillermo, 1983. "Currency Substitution in Mexico: The Dollarization Problem," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(2), pages 174-85, May.
  26. David F. Hendry & Neil R. Ericsson, 1989. "An econometric analysis of UK money demand in MONETARY TRENDS IN THE UNITED STATES AND THE UNITED KINGDOM by Milton Friedman and Anna J. Schwartz," International Finance Discussion Papers 355, Board of Governors of the Federal Reserve System (U.S.).
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  30. Robert B. Avery & Gregory E. Elliehausen & Arthur B. Kennickell & Paul A. Spindt, 1987. "Changes in the use of transaction accounts and cash from 1984 to 1986," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Mar, pages 179-196.
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  33. Neil R. Ericsson & David F. Hendry & Hong-Anh Tran, 1993. "Cointegration, seasonality, encompassing, and the demand for money in the United Kingdom," International Finance Discussion Papers 457, Board of Governors of the Federal Reserve System (U.S.).
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