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Understanding Dollarisation: A Keynesian/Kaleckian Perspective

Marco Missaglia

Review of Political Economy, 2021, vol. 33, issue 4, 656-686

Abstract: What does ‘dollarisation’ mean in a world of endogenous money, i.e., in a world where money is not (only) created by printing pieces of paper, but (mainly) by making loans? Is it true that dollarisation only constitutes a limitation of sovereignty in the short run (making it harder to run standard stabilisation macro policies) or can it also slow a country’s growth process? To answer these questions, the paper builds a theoretical Keynesian-Kaleckian growth model for a dollarised economy within a framework of endogenous money. We will show that, ceteris paribus, the steady-state medium-term growth rate of a dollarised economy is lower than that of a country with its own currency. We will also show that a dollarised economy is more likely to be unstable than an economy with its own currency, in the specific sense that, everything else being equal, it is more likely for a dollarised economy to fall into a debt trap.

Date: 2021
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DOI: 10.1080/09538259.2020.1869401

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