Uruguay has a long history of inflation. The average compound growth rate in the CPI for the period 1950-89 was of 42.8% per year. Levels below the two digits were attained in only three of those years, all of them in the 1950’s. On the other hand, inflation levels in the three digits were attained only in 1967 and 1974.

Argentina has had a sad economic history in recent decades. As of 1989 real per-capita GDP stays at a level similar to that of the early 1960's. This means a quarter of a century without growth at a time when the rest of the world has seen one of the most glowing periods in terms of economic achievements. Per-capita GDP reached a historical level in 1974 and has never again been able to surpass this level in spite of reaching it again in 1977 and 1979. Since 1980 GDP per capita starts a steep decline that results in an accumulated fall of 23.5% in the ten year period 1979-88.

Una de las hipótesis frecuentemente mencionadas respecto de los efectos redistributivos de la inflación sostiene que en el curso de un proceso inflacionario el ajuste de los precios antecede al ajuste salarial y, por consiguiente, los salarios reales caen y los márgenes reales de beneficio aumentan. En el caso de un proceso hiperinflacionario aumenta la frecuencia y la conflictividad de los ajustes de precios y salarios. En un marco caracterizado por cambios de precios relativos grandes y persistentes resulta difícil establecer contratos bien definidos en términos reales.

Desde fines de los setenta y en el curso de los ochenta en los países industrializados surgieron propuestas que propiciaban la remoción de regulaciones y rigideces en busca de nuevas normas y estructuras que pudieran asegurar una mayor flexibilidad de los mercados, en particular del mercado de trabajo. Esas propuestas, que pretendían impulsar el crecimiento del empleo sin crear en los trabajadores actitudes adversas al cambio tecnológico, evitaban tener que recurrir a las tradicionales políticas expansivas de demanda agregada, vistas como posibles fuentes de presiones inflacionarias.

Since the 1970s, a number of high-inflation Latin American countries have experienced a persistent process of "dollarization". To interpret some of the stylized facts, this paper presents a simple model in which dollarization reflects the fact that there are costs involved in switching the currency denomination of transactions. The transaction costs of dollarization define a band for the inflation differential within which there will be no incentive to switch between currencies.

This paper examines the effects on the supply of money and credit of a repatriation of foreign assets in an economy subject to currency substitution. In the absence of 100% reserve requirements, such a change in the location of deposits , which is not compensated by an increase in money demand, induces a credit boom that works itself out through a transitory current account deficit and real currency appreciation. These results are illustrated with data from the recent experience in Argentina and Peru where local banks have been authorized to capture dollar deposits from residents.