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A Dynamic Simulation Analysis of Currency Substitution in a Optimizing Framework with Transactions Costs
Economic Analysis Review
View Archive Info| Field | Value | |
| Title |
A Dynamic Simulation Analysis of Currency Substitution in a Optimizing Framework with Transactions Costs
A Dynamic Simulation Analysis of Currency Substitution in a Optimizing Framework with Transactions Costs |
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| Creator |
McNelis, Paul D.
Asilis, Carlos |
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| Subject |
—
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| Description |
This paper investigates the dynamic paths of inflation and real balances in a general equilibrium intertemporal optimization model, with transactions costs and currency substitution; when budget deficits are financed by money creation.The results show that inflationany path show more 'jumps" or explosions under the assumptions if lower transactions costs or-an increasing degree of currency substitution. Even small changes in the degrees of currency substitution with positive transactions costs sharply change the paths of intflation and real balances. Similarly, small changes in transactions costs for foreign currency, even without prior currency substirution, have marked effects on the paths of inflation and real balances.The results obtained from the simulated data are consistent with inflation processes in recent Latin American experience, where currency substitution may have taken place. Estimates of the simulated data for even a small degree of currency substitution generate generalized autoregressive conditionally heteroskedactic (GARCH) estimares of the inflation process, which are consistent with estimares for Argentina, Bolivia, Mexico, and Peru. In these countries currency substitution may have gone hand-in-hand with inflationary instabiliiy through money-financed fiscal deficits.Our results suggest that fiscal deficits financed by monetary expansion should be avoided under conditions of increasing financial openness, which provide greater opportunities for financial adaptation through currency substitution or lower transactions costs on foreign currency accumulation.
A Dynamic Simulation Analysis of Currency Substitution in a Optimizing Framework with Transactions Costs |
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| Publisher |
Universidad Alberto Hurtado - Facultad de Economía y Negocios
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| Contributor |
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| Date |
2010-03-11
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| Type |
info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion — — |
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| Format |
application/pdf
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| Identifier |
http://www.rae-ear.org/index.php/rae/article/view/223
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| Source |
Revista de Análisis Económico - Economic Analysis Review; Vol 7, No 1 (1992); 139-152
Revista de Análisis Económico – Economic Analysis Review; Vol 7, No 1 (1992); 139-152 0718-8870 0716-5927 |
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| Language |
eng
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| Relation |
http://www.rae-ear.org/index.php/rae/article/view/223/449
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