Currency Substitution and Inflation in Peru

Liliana Rojas-Suarez

No 1992/033, IMF Working Papers from International Monetary Fund

Abstract: This paper shows that there is a long-run relationship between the expected rate of depreciation in the black-market-exchange rate and the ratio of domestic to foreign money in Peru; that is, the hypothesis of currency substitution can explain the behavior of real holdings of money in Peru. The paper also shows that, while the importance of currency substitution as a transmission mechanism through which domestic policies affected the dynamics of inflation was relatively small during a period of high but relatively stable inflation (January 1978-85), it became an important factor in the inflation process during the recent hyperinflation episode.

Keywords: WP; U.S. dollar; inflation rate; foreign currency; currency substitution; money holder; foreign money; domestic money; inflation equation; transmission mechanism; Dollarization; Inflation; Exchange rates; Bank deposits; Government debt management (search for similar items in EconPapers)
Pages: 46
Date: 1992-05-01
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Citations: View citations in EconPapers (32)

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