Smuggling, Currency Substitution and Unofficial Dollarization: A Crime-Theoretic Approach

Alex Mourmouras and Steven Russell

No 2000/176, IMF Working Papers from International Monetary Fund

Abstract: Large stocks of U.S. dollars and other hard currencies circulate in the transition economies, in Latin America, and in other countries that have experienced macroeconomic mismanagement. Using a monetary model that combines the legal restrictions and crime-theoretic traditions, this paper demonstrates how leaky exchange controls lead to currency substitution and progressive dollarization. The paper also analyzes the impact of dollarization on the ability of governments to earn seigniorage, the dynamics of dollarization in a growing economy, and the central role of expectations—specifically, confidence in the domestic currency—in determining the extent of dollarization and, potentially, in reversing it.

Keywords: WP; foreign currency; hard currency; Dollarization; Currency Substitution; Smuggling; Seigniorage; currency balance; law of motion; export proceeds; home-country currency market; hard currency stock; fiat currency; Currencies; Anti-smuggling; Stocks; Currency markets; Middle East; Europe (search for similar items in EconPapers)
Pages: 44
Date: 2000-10-01
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Citations: View citations in EconPapers (4)

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