Dollarization as an Effective Commitment Device: The Case of Argentina

No 848, CEMA Working Papers: Serie Documentos de Trabajo. from Universidad del CEMA

Abstract: One of the main reasons to dollarize is to eliminate high, persistent, and volatile inflation. However, to be effective, dollarization must generate sufficient credibility, which in turn depends critically on a low expected probability of reversal. In other words, dollarization can be successful if it is an effective commitment device (ECD). Argentina once again faces high, persistent, and volatile inflation. With a looming presidential election politicians and academics are evaluating several options to stabilize prices and put the economy on a path of sustained growth. However, because of acute institutional anomie, which makes non-contingent rules under domestic jurisdiction easily reversible, even the best-intentioned policymakers cannot generate sufficient credibility. The country remains trapped in stop-go cycle of reforms that accelerates its economic decline. The root of the problem can be traced back to populism, which heightened time-inconsistency and then destroyed the formal and informal mechanisms that can reduce it. When acute institutional anomie prevails, an ECD requires surrendering discretion in monetary affairs to a foreign jurisdiction. The paper explores whether dollarization can fulfill such role in Argentina in current circumstances given the country’s history of reform reversal. The evidence suggests that, in the long-run, the strongest insurance against reversal is the support of the electorate, but in the short-run, institutional design can play a critical role.

Keywords: Foreign Exchange Rate Regimes; Dollarization; Monetary Policy; Time Inconsistency; Institutional Anomie; Argentina. (search for similar items in EconPapers)
JEL-codes: B27 E31 E5 E52 E58 F31 F32 F45 K40 N16 O24 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2023-02
New Economics Papers: this item is included in nep-cba and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cem:doctra:848

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