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Dollarization and the inflation threshold

Gaetano Antinolfi (), Claudia Landeo () and Maxim Nikitin

Canadian Journal of Economics/Revue canadienne d'économique, 2007, vol. 40, issue 2, 628-649

Abstract: 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. Les résultats empiriques suggèrent qu'il y a non linéarité dans l'impact de l'inflation sur l'intermédiation financière et le niveau d'activité réelle. Une forte inflation affecte l'intermédiation financière via la substitution de dollars ≪sous le manteau≫ aux épargnes dans les banques nationales. On développe un modèle où l'inflation et le taux d'activité réelle sont positivement co‐reliés à de bas taux d'inflation. Cependant quand l'inflation dépasse un certain seuil, les agents substituent des dollars aux dépôts dans les banques nationales, réduisant ainsi le niveau d'intermédiation financière et d'investissement. En conséquence, à de hauts niveaux d'inflation, le stock de capital et le niveau d'output deviennent inversement reliées au taux d'inflation.

Date: 2007
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https://doi.org/10.1111/j.1365-2966.2007.00424.x

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