Currency Substitution and Inflation in Peru
Keywords:
currency substitution, Peru, inflation, black-market exchange rate, demand for money, hyperinflationAbstract
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.Downloads
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Copyright (c) 1992 Liliana Rojas-Suarez
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