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Policies for Transactional De-Dollarization: A Laboratory Study

Johar Arrieta, David Florián (), Kristian López and Valeria Morales
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Johar Arrieta: Central Bank of Peru
Kristian López: UCSC
Valeria Morales: Central Bank of Peru

No 172, Working Papers from Peruvian Economic Association

Abstract: Partial currency substitution typically occurs in small economies amid economic crises, when the local currency loses some of its essential functions and a foreign currency, usually the US Dollar, is widely adopted. Interestingly, the coexistence of two currencies often persists after macroeconomic stability has been restored, which imposes challenges to the conduct of monetary policy. Central banks have responded by applying de-dollarization policies. This paper studies the effectiveness of three of them: (1) taxes on transactions in foreign currency among domestic agents, (2) storage costs on foreign currency holdings, and (3) information on the acceptance rate of the foreign currency among local agents. We extend the model in Matsuyama et al. (1993) to study the effects of these policies, both theoretically and experimentally. We contribute to the theoretical literature by characterizing a new circulation regime where agents use the foreign currency solely for international trade and settle domestic transactions exclusively in local currency. Our experimental evidence suggests that both taxes and storage costs reduce the overall acceptability of foreign currency in international and domestic transactions (around 40 percent in both cases). Information treatment does not have a significant impact relative to baseline.

Keywords: Bimonetary Economy; Dollarization; Central Bank; Monetary Policy; Experiment; Money. (search for similar items in EconPapers)
JEL-codes: C91 C92 E51 E52 E58 E59 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-cba, nep-exp, nep-mac and nep-mon
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