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Dollarization in Latin America - Gresham's Law in Reverse?

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  • Pablo Emilio Guidotti
  • Carlos A. Rodriguez

Abstract

Since the 1970s, a number of high-inflation Latin American countries have experienced persistent "dollarization." To interpret some of the stylized facts, a simple model is presented in which dollarization reflects the costs that are involved in switching the currency denomination of transactions. The transaction costs of dollarization define a band for the inflation differential within which there will be no incentive to switch between currencies. Above the upper value of the band, the local currency gradually disappears as the economy becomes fully dollarized; below the lower value, de-dollarization occurs.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 91/117.

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Length: 32
Date of creation: 01 Nov 1991
Date of revision:
Handle: RePEc:imf:imfwpa:91/117

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