Dollarization and the Inflation Threshold - Dollarisation Et Seuil D'Inflation

22 Pages Posted: 5 May 2020

See all articles by Gaetano Antinolfi

Gaetano Antinolfi

Washington University in St. Louis

Claudia M. Landeo

University of Alberta - Department of Economics

Maxim Nikitin

affiliation not provided to SSRN

Date Written: May/mai 2007

Abstract

Empirical evidence suggests non‐linearity in the impact of inflation on financial intermediation and real activity. Evidence also suggests that high inflation affects financial intermediation through the substitution of dollars ‘under the mattress’ for savings in domestic banks. We model an economy where inflation and real activity are positively related at low levels of inflation. However, when the inflation rate exceeds a threshold, agents substitute dollars for deposits issued by domestic banks, reducing the scale of financial intermediation and investment. As a consequence, at high levels of inflation, capital stock and output become negatively related to the inflation rate.

Les résultats empiriques suggèrent qu'il y a non linéarité dans l'impact de l'inflation sur l'intermédiation financière et le niveau d'activité réelle. Une forte inflation affecte l'intermédiation financière via la substitution de dollars ≪sous le manteau≫ aux épargnes dans les banques nationales. On développe un modèle où l'inflation et le taux d'activité réelle sont positivement co‐reliés à de bas taux d'inflation. Cependant quand l'inflation dépasse un certain seuil, les agents substituent des dollars aux dépôts dans les banques nationales, réduisant ainsi le niveau d'intermédiation financière et d'investissement. En conséquence, à de hauts niveaux d'inflation, le stock de capital et le niveau d'output deviennent inversement reliées au taux d'inflation.

JEL Classification: E40, E50, F41

Suggested Citation

Antinolfi, Gaetano and Landeo, Claudia M. and Nikitin, Maxim, Dollarization and the Inflation Threshold - Dollarisation Et Seuil D'Inflation (May/mai 2007). Canadian Journal of Economics/Revue canadienne d'économique, Vol. 40, Issue 2, pp. 628-649, 2007, Available at SSRN: https://ssrn.com/abstract=3592786 or http://dx.doi.org/10.1111/j.1365-2966.2007.00424.x

Gaetano Antinolfi (Contact Author)

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

Claudia M. Landeo

University of Alberta - Department of Economics ( email )

Henry Marshall Tory Building 7-25
Edmonton, Alberta T6G 2H4
Canada

HOME PAGE: http://sites.google.com/a/ualberta.ca/claudia-m-landeo-s-home-page/home

Maxim Nikitin

affiliation not provided to SSRN

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