Real dollarization, currency substitution, and inflation control

Florencia Fares, Emiliano Libman and Guido Zack

Journal of Post Keynesian Economics, 2025, vol. 48, issue 4, 772-798

Abstract: Less developed economies face additional challenges when pursuing stabilization policies in the presence of currency substitution. We build a simple model to assess the impacts of monetary policy and government spending policies on inflation and the foreign exchange market. This model shows that high-inflation economies are inherently more volatile and potentially unstable due to the presence of dollarization. To illustrate the model, we present the feeble stabilization attempts in Argentina. We find that in Argentina, increments of the exchange rate market pressure or interest rates tend to correlate with increasing foreign currency demand.

Date: 2025
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DOI: 10.1080/01603477.2024.2444256

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