Dollarization and the conquest of hyperinflation in divided societies

Russell Cooper and Hubert Kempf ()

Quarterly Review, 2001, vol. 25, issue Sum, 3-12

Abstract: This study argues that the delegation of monetary policy control by one country to another can reduce inflation in the delegating country. Hyperinflation is common in a divided society, one in which special interest groups can pressure a weak central government to issue money to finance their own demands while neglecting the country?s overall welfare. A commitment device like dollarization or a currency board, which gives control of the divided country?s money supply to another country, can eliminate this inflation bias. This is illustrated by Argentina?s experience with inflation and a currency board which, in effect, gave control of Argentina?s money supply to the United States. This argument is made precise using a two-country overlapping generations model to study the effects of delegation. The study also finds that a dollarization treaty between the two countries can be welfare-improving for both

Keywords: Dollarization (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (30)

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