Dollarization, Financial Intermediation and Real Activity: The Inflation Threshold

23 Pages Posted: 17 Aug 2005

See all articles by Claudia M. Landeo

Claudia M. Landeo

University of Alberta - Department of Economics

Gaetano Antinolfi

Washington University in St. Louis - Department of Economics

Maxim Nikitin

Higher School of Economics

Date Written: July 30, 2005

Abstract

This paper analyzes the relationship among inflation, dollarization, financial intermediation, and real activity. Empirical evidence suggests non-linearity in the effects of inflation on financial intermediation and real activity, i.e., the existence of an inflation threshold. Evidence also suggests that one way in which inflation affects financial intermediation in high inflation economies is through the substitution of dollars "under the mattress" for savings in domestic banks. Our model captures these empirical regularities. Inflation and real activity are positively related at low levels of inflation. When the inflation rate exceeds certain threshold, however, agents substitute in their portfolios dollars (a non-productive asset of constant value that also provides liquidity services) for deposits issued by domestic banks. This substitution reduces the scale of financial intermediation and the capital investment in the economy. As a consequence, at high levels of inflation the levels of capital stock and output become negatively related to the inflation rate.

Keywords: Dollarization, Inflation, Financial Intermediation

JEL Classification: E40, E50, F41

Suggested Citation

Landeo, Claudia M. and Antinolfi, Gaetano and Nikitin, Maxim, Dollarization, Financial Intermediation and Real Activity: The Inflation Threshold (July 30, 2005). Available at SSRN: https://ssrn.com/abstract=776104 or http://dx.doi.org/10.2139/ssrn.776104

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

Gaetano Antinolfi

Washington University in St. Louis - Department of Economics ( email )

One Brookings Drive
St. Louis, MO 63130
United States
314-935-7335 (Phone)
314-935-4156 (Fax)

Maxim Nikitin (Contact Author)

Higher School of Economics ( email )

ICEF
Pokrovskiy bulvar 11
Moscow, 109028
Russia

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