Currency competition and inflation convergence
All agree partial dollarization or currency substitution is a legacy of past inflation and exchange rate instability. Some argue partial dollarization contributes to exchange rate instability. However, if Central Banks respond to dollarization by lowering money growth and maximizing seigniorage revenue, inflation falls and converges on dollar inflation rates. We present a simple model of currency competition with open capital markets to illustrate these points. Empirical tests for Latin America and about twenty other countries suggest that dollarization is both a legacy of past inflation and a constraint on future inflation. Dollarization may complicate monetary policy and prudential regulation, but one silver lining is that currency competition appears to have accelerated the sharp fall in and convergence of Latin inflation rates over the past decade.
|Date of creation:||2004|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.dallasfed.org/|
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
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.:
- Gomis-Porqueras, Pere & Serrano, Carlos & Somuano, Alejandro, 2000. "Currency substitution in Latin America - lessons from the 1990s," Policy Research Working Paper Series 2340, The World Bank.
- Girton, Lance & Roper, Don E, 1981. "Theory and Implications of Currency Substitution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(1), pages 12-30, February.
- Dani Rodrik, 1989.
"Policy Uncertainty and Private Investment in Developing Countries,"
NBER Working Papers
2999, National Bureau of Economic Research, Inc.
- Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, vol. 36(2), pages 229-242, October.
- David Romer, 1991.
"Openness and Inflation: Theory and Evidence,"
NBER Working Papers
3936, National Bureau of Economic Research, Inc.
- Gianni De Nicolo & Patrick Honohan & Alain Ize, 2003.
"Dollarization of the Banking System; Good or Bad?,"
IMF Working Papers
03/146, International Monetary Fund.
- De Nicolo, Gianni & Honohan, Patrick & Ize, Alain, 2003. "Dollarization of the banking system : good or bad?," Policy Research Working Paper Series 3116, The World Bank.
- David Bowman, 2003. "Market power and inflation," International Finance Discussion Papers 783, Board of Governors of the Federal Reserve System (U.S.).
- Sturzenegger, Federico A, 1994. "Hyperinflation with Currency Substitution: Introducing an Indexed Currency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 377-95, August.
- Adam Bennett & Eduardo Borensztein & TomÃ¡s J. T. BaliÃ±o, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
- Gruben, William C. & McLeod, Darryl, 2002. "Capital account liberalization and inflation," Economics Letters, Elsevier, vol. 77(2), pages 221-225, October.
- Fridman Alla & Verbetsky Aleksey, 2001. "Currency Substitution in Russia," EERC Working Paper Series 01-05e, EERC Research Network, Russia and CIS.
- Christina D. Romer & David Romer, 1999.
"Monetary policy and the well-being of the poor,"
Federal Reserve Bank of Kansas City, issue Q I, pages 21-49.
- Christina D. Romer & David Romer, 1998. "Monetary policy and the well-being of the poor," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 159-201.
- Robert J. Barro & David B. Gordon, 1981.
"A Positive Theory of Monetary Policy in a Natural-Rate Model,"
NBER Working Papers
0807, National Bureau of Economic Research, Inc.
- Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
- Robert J. Barro, 1983.
"Inflationary Finance under Discretion and Rules,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 16(1), pages 1-16, February.
- Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-25, June.
- Marta Campillo & Jeffrey A. Miron, 1997.
"Why Does Inflation Differ across Countries?,"
in: Reducing Inflation: Motivation and Strategy, pages 335-362
National Bureau of Economic Research, Inc.
- Kenneth S. Rogoff, 2003.
"Globalization and global disinflation,"
Proceedings - Economic Policy Symposium - Jackson Hole,
Federal Reserve Bank of Kansas City, pages 77-112.
- Eliana Cardoso, 1992. "Inflation and Poverty," NBER Working Papers 4006, National Bureau of Economic Research, Inc.
- Roberto Chang & Andres Velasco, 2002. "Dollarization: Analytical Issues," NBER Working Papers 8838, National Bureau of Economic Research, Inc.
- Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, December.
- Canzoneri, Matthew B. & Diba, Behzad T., 1992. "The inflation discipline of currency substitution," European Economic Review, Elsevier, vol. 36(4), pages 827-845, May.
When requesting a correction, please mention this item's handle: RePEc:fip:feddcl:0204. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Chapman)
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.