Monetary policy in a dollarised economy: The case of Peru

Quispe Misaico, Zenon (2000): Monetary policy in a dollarised economy: The case of Peru. Published in: Monetary Policy Frameworks in a Global Context. Edited by Lavan Mahadeva and Gabriel Sterne. Book published by Routledge and Bank of England No. ISBN 0-415-22618-X (hbk) ISBN 0-415-23768-8 (pbk) (2000): pp. 330-353.

Abstract

Persistent high inflation in Peru during the 1970s led households to hold foreign currency as store of value. This process of dollarisation increased significantly during the hyperinflation of 1988-90. In the years that followed, a wide-ranging package of reforms in the financial system and in the conduct of monetary policy and fiscal policy were introduced to bring a halt to the hyperinflation. But despite nearly a decade of subsequent economic stabilisation, the decrease in dollarisation has been slow: by June 1999 two thirds of domestic banking deposits were still denominated in dollars, only ten percentage points below their level in 1991.

How has dollarisation affected the efficacy of monetary policy in Peru? In theory, under dollarisation, revisions in expectations of devaluation can lead to instability of the domestic money demand, making monetary control more difficult. But instability in the demand for base money would seem to arise more from a dollarisation characterised by currency substitution (using dollars for transactions) than one characterised by asset substitution (using dollars as a store of wealth).

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary policy; Dollarisation
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit

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