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Smuggling, Currency Substitution and Unofficial Dollarization; A Crime-Theoretic Approach

Listed author(s):
  • Alex Mourmouras
  • Steven Russell
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    Large stocks of U.S. dollars and other hard currencies circulate in the transition economies, in Latin America, and in other countries that have experienced macroeconomic mismanagement. Using a monetary model that combines the legal restrictions and crime-theoretic traditions, this paper demonstrates how leaky exchange controls lead to currency substitution and progressive dollarization. The paper also analyzes the impact of dollarization on the ability of governments to earn seigniorage, the dynamics of dollarization in a growing economy, and the central role of expectations—specifically, confidence in the domestic currency—in determining the extent of dollarization and, potentially, in reversing it.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 00/176.

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    Length: 44
    Date of creation: 01 Oct 2000
    Handle: RePEc:imf:imfwpa:00/176
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