Dollarization as an Effective Commitment Device: The Case of Argentina

CEMA Working Paper / CEMA Documento de Trabajo DT848

One of the main justifications to dollarize an emerging market economy is to eliminate high, persistent, and volatile inflation. This requires generating sufficient credibility, which in turn depends critically on whether its expected probability of reversal is low. Argentina once again faces this predicament. Because of 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 the problem of time-inconsistency and then destroyed the formal and informal mechanisms that could have solved it. When institutional anomie is acute, an effective commitment device requires surrendering discretion in monetary affairs to a foreign jurisdiction. Dollarization could fulfill such role. The evidence suggests that in the long-run the strongest insurance against reversal is the support of the electorate. However, in the short-run, the institutional design of dollarization is critical.

Aca el link para bajar el paper/Link to download the paper: https://ucema.edu.ar/documento-trabajo/dollarization-effective-commitment-device-case-argentina