Monetary Policy in a Dollarized Economy: the Case of Peru
Persistent high inflation in Peru during the 1970s led households to hold foreign currency as store of value. This process of dollarisation increased significantly during the hyperinflation of 1988-90. In the years that followed, a wide-ranging package of reforms in the financial system and in the conduct of monetary policy and fiscal policy were introduced to bring a halt to the hyperinflation. But despite nearly a decade of subsequent economic stabilisation, the decrease in dollarisation has been slow: by June 1999 two thirds of domestic banking deposits were still denominated in dollars, only ten percentage points below their level in 1991. How has dollarisation affected the efficacy of monetary policy in Peru? In theory, under dollarisation, revisions in expectations of devaluation can lead to instability of the domestic money demand, making monetary control more difficult. But instability in the demand for base money would seem to arise more from a dollarisation characterised by currency substitution (using dollars for transactions) than one characterised by asset substitution (using dollars as a store of wealth).
(This abstract was borrowed from another version of this item.)
Volume (Year): XIII (2000)
Issue (Month): 2 (July-December)
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