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Dollarization and the inflation threshold

  • Gaetano Antinolfi
  • Claudia M. Landeo
  • Maxim Nikitin

Empirical evidence suggests non-linearity in the impact of inflation on financial intermediation and real activity. Evidence also suggests that high inflation affects financial intermediation through the substitution of dollars `under the mattress' for savings in domestic banks. We model an economy where inflation and real activity are positively related at low levels of inflation. However, when the inflation rate exceeds a threshold, agents substitute dollars for deposits issued by domestic banks, reducing the scale of financial intermediation and investment. As a consequence, at high levels of inflation, capital stock and output become negatively related to the inflation rate.

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Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 40 (2007)
Issue (Month): 2 (May)
Pages: 628-649

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Handle: RePEc:cje:issued:v:40:y:2007:i:2:p:628-649
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