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 whether its expected probability of reversal is low. In other words, whether 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 could have moderated it. With acute institutional anomie, 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.

Enlace al trabajo publicado.

https://ucema.edu.ar/documento-trabajo/dollarization-effective-commitment-device-case-argentina