Working Paper: NBER ID: w4184
Authors: Federico Sturzenegger
Abstract: Currency substitution (CS) and financial adaptation are in general believed to increase the equilibrium rate of inflation. This result derives from a setup in which the government finances a certain amount of real resources through money printing and where CS reduces the base of the inflation tax. This paper shows this intuition wrong for those situations where the hyperinflation is expectations-driven. Incorporating CS in an Obstfeld-Rogoff (1983) framework I show reduces the inflation rates along the hyperinflationary equilibrium. The intuition is simple: if agents have an easy way of substituting away from domestic currency then the required inflation rates to sustain a path where real balances disappears is necessarily lower. The implications of the model are then tested empirically.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| currency substitution (F31) | lower inflation rates (E31) |
| introduction of indexed currency (E42) | lower inflation rates (E31) |
| indexed currency (F31) | decline in acceleration of inflation rates (E31) |
| currency substitution (F31) | less inflation than without currency substitution along hyperinflation path (E41) |