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.