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Smuggling, Currency Substitution and Unofficial Dollarization

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  • Alex Mourmouras
  • Steven Russell
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    Abstract

    Large stocks of U.S. dollars and other hard currencies circulate in the transition economies, in Latin America, and in other countries that have experienced macroeconomic mismanagement. Using a monetary model that combines the legal restrictions and crime-theoretic traditions, this paper demonstrates how leaky exchange controls lead to currency substitution and progressive dollarization. The paper also analyzes the impact of dollarization on the ability of governments to earn seigniorage, the dynamics of dollarization in a growing economy, and the central role of expectations—specifically, confidence in the domestic currency—in determining the extent of dollarization and, potentially, in reversing it.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 00/176.

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    Length: 44
    Date of creation: 01 Oct 2000
    Date of revision:
    Handle: RePEc:imf:imfwpa:00/176

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    Related research

    Keywords: Smuggling; Currency substitution; Dollarization; foreign currency; equation; difference equation; probability; optimization; inflation; equations; monetary economics; price level; black market; terms of trade; foreign exchange; rate of inflation; monetary policy; time series; real value; macroeconomic analysis; aggregate demand; quantity theory; real money; money supply;

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    Cited by:
    1. Marek Dabrowski & Wojciech Paczynski & Lukasz Rawdanowicz, 2002. "Inflation and Monetary Policy in Russia: Transition Experience and Future Recommendations," CASE Network Studies and Analyses, CASE-Center for Social and Economic Research 0241, CASE-Center for Social and Economic Research.

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