The Dynamics of Inflation and Currency Substitution in a Small Open Economy
AbstractIn this paper, we analyse the relationship between money and inflation in a small open economy where domestic and foreign currencies are perfect substitutes as means of payment. It is shown that, if the path of domestic money supply is such that individuals find it optimal to change the currency in which transactions are settled, there will be an adjustment period during which domestic inflation adjusts so as to equalise the foreign inflation rate. In the case of a disinflation program, it is shown that the foreign currency is not necessarily abandoned as means of payment. The results obtained are consistent with both dollarisation hysteresis and reversibility, without requiring the specification of dollarisation costs.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 1/2004.
Date of creation: 2004
Date of revision:
Contact details of provider:
Postal: Núcleo de Investigação em Políticas Económicas, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal
Phone: +351-253604510 ext 5532
Web page: http://www3.eeg.uminho.pt/economia/nipe/versao_inglesa/index_uk.htm
More information through EDIRC
Other versions of this item:
- Lebre de Freitas, M., 2004. "The dynamics of inflation and currency substitution in a small open economy," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 133-142, February.
- Miguel Lebre de Freitas, 2003. "The dynamics of inflation and currency substitution in a small open economy," Working Papers de Economia (Economics Working Papers) 02, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro, revised Aug 2003.
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-01-25 (All new papers)
- NEP-IFN-2004-01-25 (International Finance)
- NEP-MAC-2004-01-25 (Macroeconomics)
- NEP-MON-2004-01-25 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Clements, Benedict & Schwartz, Gerd, 1993. "Currency substitution: The recent experience of Bolivia," World Development, Elsevier, vol. 21(11), pages 1883-1893, November.
- Pablo E. Guidotti & Carlos A. Rodriguez, 1992.
"Dollarization in Latin America: Gresham's Law in Reverse?,"
IMF Staff Papers,
Palgrave Macmillan, vol. 39(3), pages 518-544, September.
- 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.
- Pablo Emilio Guidotti & Carlos A. Rodriguez, 1991. "Dollarization in Latin America - Gresham's Law in Reverse?," IMF Working Papers 91/117, International Monetary Fund.
- Rudiger Dornbusch & Alejandro Reynoso, 1989.
"Financial Factors in Economic Development,"
NBER Working Papers
2889, National Bureau of Economic Research, Inc.
- Federico Sturzenegger, 1992. "Inflation and Social Welfare in a Model With Endogenous Financial Adaptation," NBER Working Papers 4103, National Bureau of Economic Research, Inc.
- Chang, Roberto, 1989.
"Endogenous Currency Substitution, Inflationary Finance, And Welfare,"
89-12, C.V. Starr Center for Applied Economics, New York University.
- Chang, Roberto, 1994. "Endogenous Currency Substitution, Inflationary Finance, and Welfare," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 903-16, November.
- Dowd, Kevin & Greenaway, David, 1993. "Currency Competition, Network Externalities and Switching Costs: Towards an Alternative View of Optimum Currency Areas," Economic Journal, Royal Economic Society, vol. 103(420), pages 1180-89, September.
- Martin Uribe, 1995.
"Hysteresis in a simple model of currency substitution,"
International Finance Discussion Papers
509, Board of Governors of the Federal Reserve System (U.S.).
- Uribe, Martin, 1997. "Hysteresis in a simple model of currency substitution," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 185-202, September.
- 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.
- Federico A. Sturzenegger, 1992. "Inflation and Social Welfare in a Model with Endogenous Financial Adaptation," UCLA Economics Working Papers 658, UCLA Department of Economics.
- Kyriakos C. Neanidis & Christos S. Savva, 2006.
"The Effects of Uncertainty on Currency Substitution and Inflation: Evidence from Emerging Economies,"
The School of Economics Discussion Paper Series
0609, Economics, The University of Manchester.
- K C Neanidis & C S Savva, 2006. "The Effects of Uncertainty on Currency Substitution and Inflation: Evidence from Emerging Economies," Centre for Growth and Business Cycle Research Discussion Paper Series 71, Economics, The Univeristy of Manchester.
- Stix, Helmut, 2008. "Euroization: What Factors drive its Persistence?," Working Papers 140, Oesterreichische Nationalbank (Austrian Central Bank).
- Yinusa, D. Olalekan, 2009. "Macroeconomic Fluctuations and Deposit Dollarization in Sub-Saharan Africa: Evidence from Panel Data," MPRA Paper 16259, University Library of Munich, Germany, revised 2009.
- Miguel Lebre de Freitas, 2004.
"Currency Substitution, portfolio Diversification and Money Demand,"
NIPE Working Papers
9/2004, NIPE - Universidade do Minho.
- Miguel Lebre de Freitas & Francisco José Veiga, 2006. "Currency substitution, portfolio diversification, and money demand," Canadian Journal of Economics, Canadian Economics Association, vol. 39(3), pages 719-743, August.
- Miguel Lebre de Freitas, 2004. "Currency Substitution, Portfolio Diversification and Money Demand," Econometric Society 2004 Latin American Meetings 263, Econometric Society.
- Miguel Lebre de Freitas, 2006.
"Currency Substitution and Money Demand in Euroland,"
Atlantic Economic Journal,
International Atlantic Economic Society, vol. 34(3), pages 275-287, September.
- Miguel Lebre de Freitas, 2003. "Currency substitution and money demand in Euroland," NIPE Working Papers 11/2003, NIPE - Universidade do Minho.
- Stix, Helmut & Scheiber, Thomas, 2009. "Euroization in Central, Eastern and Southeastern Europe – New Evidence On Its Extent and Some Evidence On Its Causes," Working Papers 159, Oesterreichische Nationalbank (Austrian Central Bank).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maria João Thompson).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.