Search Results
Journal Article
Dollarization: will the quick fix pay off in the long run?
Working Paper
Demand for U.S Banknotes at Home and Abroad: A Post-Covid Update
In principle, physical currency should be disappearing: payments are increasingly electronic, with new technologies emerging rapidly, and governments increasingly restrict large-denomination notes as a way to reduce crime and tax evasion. Nonetheless, demand for U.S. banknotes continues to grow, and consistently increases at times of crisis both within and outside the United States because dollar banknotes remain a desirable store of value and medium of exchange when local currency or bank deposits are inferior. Most recently, the COVID crisis resulted in historic increases in currency ...
Working Paper
Has monetary policy been so bad that it is better to get rid of it? the case of Mexico
Motivated by the dollarization debate in Mexico, we estimate an identified vector autoregression for the Mexican economy using monthly data from 1976 to 1997, taking into account the changes in the monetary policy regime which occurred during this period. We find that 1) exogenous shocks to monetary policy have had no impact on output and prices, 2) most of the shocks originated in the foreign sector, 3) disturbances originating in the U.S. economy have been a more important source of fluctuations for Mexico than shocks to oil prices. We also study the endogenous response of domestic monetary ...
Journal Article
Reality check
What do the data say about dollarization and international lending?
Working Paper
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 ...
Journal Article
Dollarization and the conquest of hyperinflation in divided societies
This study argues that the delegation of monetary policy control by one country to another can reduce inflation in the delegating country. Hyperinflation is common in a divided society, one in which special interest groups can pressure a weak central government to issue money to finance their own demands while neglecting the country?s overall welfare. A commitment device like dollarization or a currency board, which gives control of the divided country?s money supply to another country, can eliminate this inflation bias. This is illustrated by Argentina?s experience with inflation and a ...
Report
Financial Crises and Lending of Last Resort in Open Economies
We study financial panics in a small open economy with floating exchange rates. In our model, bank runs trigger a decline in domestic wealth and a currency depreciation. Runs are more likely when banks have dollar debt. Dollar debt emerges endogenously in response to the precautionary motive of domestic savers: dollar savings provide insurance against crises; so when crises are possible it becomes relatively more expensive for banks to borrow in local currency, which gives them an incentive to issue dollar debt. This feedback between aggregate risk and savers? behavior can generate multiple ...
Working Paper
Currency Boards, Dollarized Liabilities, and Monetary Policy Credibility
The recent collapse of the Argentine currency board raises new questions about the desirability of formal fixed exchange rate regimes in modern developing economies. This paper examines the impact of dollarized liabilities with potential default for a currency board with costly abandonment. We compare the performance of a currency board to a central bank with full discretion in two environments: One with only idiosyncratic firm shocks, and one with both idiosyncratic shocks and shocks to the dollar-euro rate. We show that the possibility of default with peso-valued exports generates a risk ...