Currency Substitution and Inflation in Peru
May 1, 1992
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Summary
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.
Subject: Bank deposits, Dollarization, Exchange rates, Financial services, Foreign exchange, Government debt management, Inflation, Monetary policy, Prices, Public financial management (PFM)
Keywords: Bank deposits, currency substitution, Dollarization, domestic money, Exchange rates, foreign currency, foreign money, Government debt management, Inflation, inflation equation, inflation rate, money holder, transmission mechanism, U.S. dollar, WP
Pages:
46
Volume:
1992
DOI:
Issue:
033
Series:
Working Paper No. 1992/033
Stock No:
WPIEA0331992
ISBN:
9781451979206
ISSN:
1018-5941
