Dollarization Traps

36 Pages Posted: 27 Nov 2004 Last revised: 6 May 2016

See all articles by John Duffy

John Duffy

University of California, Irvine; University of California, Irvine

Maxim Nikitin

Higher School of Economics

R. Todd Smith

University of Alberta

Date Written: June 1, 2004


The paper analyzes dollarization in the sense of asset substitution, where a foreign currency competes with local assets, especially domestic capital, as a store of value, the impact of dollarization on capital accumulation and output, and why economies remain dollarized long after a successful inflation stabilization. We relate this dollarization hysteresis to a financial intermediation failure that happens during high inflation. We show that in dollarized countries, inflation stabilization policies may not have any effect on domestic capital accumulation, thus, preventing such policies for stimulating growth - i.e., dollarized economies are vulnerable to dollarization traps.

Keywords: Dollarization, Asset Substitution, Hysteresis, Inflation, Financial Intermediation

JEL Classification: E40, E50, F41, E41

Suggested Citation

Duffy, John and Nikitin, Maxim and Smith, Richard Todd, Dollarization Traps (June 1, 2004). Journal of Money, Credit, and Banking, Vol. 38, No. 8, 2006, Available at SSRN: or

John Duffy

University of California, Irvine ( email )

Department of Economics
3151 Social Science Plaza
Irvine, CA 92697
United States
949-824-8341 (Phone)

University of California, Irvine ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

Maxim Nikitin (Contact Author)

Higher School of Economics ( email )

Pokrovskiy bulvar 11
Moscow, 109028

Richard Todd Smith

University of Alberta ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
403-492-7898 (Phone)
403-492-3300 (Fax)

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