Hoover Institution economist (and colleague) John Cochrane has an excellent long post on dollarization in Argentina.
One highlight:
Dollarization is no panacea. It will work if it is accompanied by fiscal and microeconomic reform. It will be of limited value otherwise. I’ll declare a motto: All successful inflation stabilizations have come from a combination of fiscal, monetary and microeconomic reform. (italics in original)
That reminds me of what Michael K. Salemi wrote about what has been learned about ending hyperinflations. He wrote the entry “Hyperinflation” in The Concise Encyclopedia of Economics. While Argentina is far from having hyperinflation, which, as Salemi notes, is typically used “to describe episodes when the monthly inflation rate is greater than 50 percent,” Argentina does have very high inflation, in excess of 100% in the last 12 months. So the same principles for ending hyperinflation apply for ending, or at least substantially reducing, Argentina’s inflation.
Here are Salemi’s two key paragraphs on ending hyperinflations:
How do hyperinflations end? The standard answer is that governments have to make a credible commitment to halting the rapid growth in the stock of money. Proponents of this view consider the end of the German hyperinflation to be a case in point. In late 1923, Germany undertook a monetary reform, creating a new unit of currency called the rentenmark. The German government promised that the new currency could be converted on demand into a bond having a certain value in gold. Proponents of the standard answer argue that the guarantee of convertibility is properly viewed as a promise to cease the rapid issue of money.
An alternative view held by some economists is that not just monetary reform, but also fiscal reform, is needed to end a hyperinflation. According to this view, a successful reform entails two believable commitments on the part of government. The first is a commitment to halt the rapid growth of paper money. The second is a commitment to bring the government’s budget into balance. This second commitment is necessary for a successful reform because it removes, or at least lessens, the incentive for the government to resort to inflationary taxation. If the government commits to balancing its budget, people can reasonably believe that money growth will not rise again to high levels in the near future. Thomas Sargent, a proponent of the second view, argues that the German reform of 1923 was successful because it created an independent central bank that could refuse to monetize the government deficit and because it included provisions for higher taxes and lower government expenditures. Another way to look at Sargent’s view is that hyperinflations end when people reasonably believe that the rate of money growth will fall to normal levels both now and in the future.
My EconLog co-blogger Scott Sumner also has insights about dollarization.
