The Pattern of Currency Substitution in Latin America: An Overview

Abstract

This paper identifies the stylized facts and common features of recent currency substitution episodes in Bolivia, México, Perú and Uruguay. It discusses the relationship between macroeconomic policies and the pattern of currency substitution in these countries and investigates the effects that the presence of foreign currency deposits had on their demand for domestic money and on their ability to conduct monetary and exchange rate policy. The paper argues that the decision to allow foreign currency deposits in the domestic financial system tends to increase the inflationary impact of fiscal imbalances and exchange rate adjustments and jeopardizes the sustainability of a managed exchange rate regime.