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Monetary Policy in a Dollarized Economy: the Case of Peru

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  • Zenón Quispe

    (Banco Central de Reserva del Perú)

Abstract

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).
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Suggested Citation

  • Zenón Quispe, 2000. "Monetary Policy in a Dollarized Economy: the Case of Peru," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 167-206, July-Dece.
  • Handle: RePEc:cml:moneya:v:xiii:y:2000:i:2:p:167-206
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    Cited by:

    1. Paul Castillo & Alberto Humala & Vicente Tuesta, 2007. "Monetary Policy, Regime Shifts, and Inflation Uncertainty in Peru (1949-2006)," Working Papers 2007-005, Banco Central de Reserva del Perú.
    2. Renzo Rossini & Zenon Quispe & Rocío Gondo, 2008. "Macroeconomic implications of capital inflows: Peru 1991–2007," BIS Papers chapters,in: Bank for International Settlements (ed.), Financial globalisation and emerging market capital flows, volume 44, pages 363-387 Bank for International Settlements.
    3. Winkelried, Diego & Castillo, Paul, 2010. "Dollarization persistence and individual heterogeneity," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1596-1618, December.
    4. Castillo, Paul & Pérez, Fernando & Tuesta, Vicente, 2011. "Los mecanismos de transmisión de la política monetaria en Perú," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 21, pages 41-63.
    5. Llosa, Gonzalo & Tuesta, Vicente & Vega, Marco, 2006. "Un modelo de proyección BVAR para la inflación peruana," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 13.
    6. Ize, Alain, 2001. "Implicancias de la dolarización parcial para el régimen de metas de inflación: Un análisis basado en la literatura sobre dolarización," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 7.
    7. Marcelin, Isaac & Mathur, Ike, 2016. "Financial sector development and dollarization in emerging economies," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 20-32.

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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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