Dollarization in Latin America: Gresham`s Law in Reverse?

32 Pages Posted: 15 Feb 2006  

Pablo E. Guidotti

Ministry Of Economy, Public Works and Services, Argentina

Date Written: December 1991

Abstract

Since the 1970s, a number of high-inflation Latin American countries have experienced a persistent process of "dollarization". To interpret some of the stylized facts, this paper presents a simple model in which dollarization reflects the fact that there are costs involved in switching the currency denomination of transactions. The transaction costs of dollarization define a band for the inflation differential within which there will be no incentive to switch between currencies. Above the upper value of the band, the local currency gradually disappears as the economy becomes fully dollarized; below the lower value, de-dollarization occurs.

JEL Classification: E4, F41

Suggested Citation

Guidotti, Pablo E., Dollarization in Latin America: Gresham`s Law in Reverse? (December 1991). IMF Working Paper, Vol. , pp. 1-46, 1991. Available at SSRN: https://ssrn.com/abstract=885151

Pablo E. Guidotti (Contact Author)

Ministry Of Economy, Public Works and Services, Argentina ( email )

Hipolito Yrigoyen 250-5th Floor-Room 506
Buenos Aires, 1310
Argentina

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