Abstract

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 from stimulating growth—i.e. dollarized economies are vulnerable to “dollarization

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Additional Information

ISSN
1538-4616
Print ISSN
0022-2879
Pages
pp. 2073-2097
Launched on MUSE
2007-01-22
Open Access
No
Archive Status
Archived 2007
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