High Inflation, Price Stability and Hysteresis Effect: Evidence from Argentina

Carlos Dabús; Fernando Delbianco; Andrés Fioriti

doi:10.4067/S0718-88702016000100004

Authors

Carlos Dabús CONICET IIESS - Departamento de Economía, UNS
Fernando Delbianco CONICET IIESS - Departamento de Economía, UNS
Andrés Fioriti Department of Economics, University of Warwick

DOI:

https://doi.org/10.4067/S0718-88702016000100004

Keywords:

Hysteresis effect, money demand, currency substitution

Abstract

We estimate a Currency Substitution model for 1980-2013 periods in Argentina. Following the Mongardini and Mueller (2000) specification, our paper studies the persistence of lower demand of local money, or dollarization, by including a hysteresis variable. By applying an ARDL (Auto Regressive Distributed Lags) model, we found a clear ratchet effect, which implies that in the short run agents do not adjust to changes on the fundamentals, leading to a significant hysteresis variable.

Downloads

Download data is not yet available.

References

Arize, C. A. (1991). Currency substitution in Korea. The American Economist, 35(2), 67–72.

Capristán, C., & Ramos Francia, M. (2009). Inflation dynamics in Latin America. Contemporary Economic Policy, 27(3), 349–362.

Clements, B., & Schwartz, G. (1993). Currency substitution: The recent experience of Bolivia. World Development, 21(11), 1883–1893. https://doi.org/10.1016/0305-750x(93)90089-r

Dabus, C. (1994). Inflación, precios relativos y cambio estructural: Argentina 1960–1990 [Inflation, relative prices and structural change: Argentina 1960–1990]. Estudios de Economía, 21(1), 47–64.

Feige, E., Faulend, M., Šonje, V., & Šošić, V. (2003). Unofficial dollarization in Latin America: Currency substitution, network externalities and irreversibility. In J. Dean, D. Salvatore, & T. Willett (Eds.), The dollarization debate (pp. 47–71). Oxford University Press. https://doi.org/10.1093/0195155351.003.0003

Johnson, C. (2002). Inflation uncertainty in Chile: Asymmetries and the news impact curve. Revista de Análisis Económico, 17(1), 3–20.

Kamin, S. B., & Ericsson, N. R. (2003). Dollarization in post-hyperinflationary Argentina. Journal of International Money and Finance, 22(2), 185–211. https://doi.org/10.1016/s0261-5606(02)00103-1

McLoughlin, C., & Kinoshita, N. (2012). Monetization in low- and middle-income countries (IMF Working Paper 12/160). International Monetary Fund.

Melvin, M. (1988). The dollarization of Latin America as a market-enforced monetary reform: Evidence and implications. Economic Development and Cultural Change, 36(3), 543–558. https://doi.org/10.1086/451674

Miles, M. A. (1978). Currency substitution, flexible exchange rates and monetary independence. American Economic Review, 68, 428–436.

Miles, M. A. (1981). Currency substitution: Some further results and conclusions. Southern Economic Journal, 43(8), 78–86. https://doi.org/10.2307/1058598

Mongardini, J., & Mueller, J. (2000). Ratchet effects in currency substitution: An application to the Kyrgyz Republic. IMF Staff Papers, 47(2), 218–237. https://doi.org/10.2307/3867659

Pesaran, M. H., Shin, Y., & Smith, R. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. https://doi.org/10.1002/jae.616

Pesaran, M. H., & Smith, R. (1995). Estimating long-run relationships from dynamic heterogeneous panels. Journal of Econometrics, 68(1), 79–113. https://doi.org/10.1016/0304-4076(94)01644-f

Prock, J., Soydemir, G. A., & Abugri, B. A. (2003). Currency substitution: Evidence from Latin America. Journal of Policy Modeling, 25(4), 415–430. https://doi.org/10.1016/s0161-8938(03)00013-9

Ramírez-Rojas, C. (1985). Currency substitution in Argentina, Mexico, and Uruguay. IMF Staff Papers, 32(4), 629–667. https://doi.org/10.2307/3866742

Reding, P., & Morales, J. A. (2004). Currency substitution and network externalities (SSRN Working Paper 549061). Social Science Research Network.

Rojas-Suárez, L. (1992). Currency substitution and inflation in Peru. Revista de Análisis Económico, 7(1), 153–176.

Sharma, S., Kandil, M., & Chaisrisawatsuk, S. (2005). Currency substitution in Asian countries. Journal of Asian Economics, 16(3), 489–532. https://doi.org/10.1016/j.asieco.2005.04.013

Tavlas, G. S. (1996). Currency substitution and the international demand for yen. In P. Mizen & E. J. Pentecost (Eds.), The macroeconomics of international currencies: Theory, policy and evidence (pp. 178–192). Edward Elgar.

Valev, N. T. (2010). The hysteresis of currency substitution: Currency risk vs. network externalities. Journal of International Money and Finance, 29(2), 224–235.