Dollarization and the Inflation Threshold

22 Pages Posted: 19 May 2007

See all articles by Gaetano Antinolfi

Gaetano Antinolfi

Washington University in St. Louis - Department of Economics

Claudia M. Landeo

University of Alberta - Department of Economics

Maxim Nikitin

Higher School of Economics

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.

Suggested Citation

Antinolfi, Gaetano and Landeo, Claudia M. and Nikitin, Maxim, Dollarization and the Inflation Threshold. Canadian Journal of Economics, Vol. 40, No. 2, pp. 628-649, May 2007, Available at SSRN: https://ssrn.com/abstract=986763 or http://dx.doi.org/10.1111/j.1365-2966.2007.00424.x

Gaetano Antinolfi (Contact Author)

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

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

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

Higher School of Economics ( email )

ICEF
Pokrovskiy bulvar 11
Moscow, 109028
Russia

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