Inflation Policy

Following the collapse of Bretton-Woods and the
advent of floating exchange rates, economists noted
the emergence of demand side substitution of the
world s currencies, a phenomenon that has become
known as dollarization and currency substitution.
Currency substitution presents a number of problems
to the policy maker and to the country experiencing
the phenomenon. In this book, Michael J. Welker
offers a summary of several key considerations that
motivate this and other research on currency
substitution. The discussion assumes the traditional
welfare concept in macroeconomics that any reduction
in the effectiveness of monetary and fiscal policy
impairs the efficiency of resource allocation and
the rate of economic growth. In theoretical work on
currency substution one line of thought suggests
that real exchange rate depreciation will result
when a small open economy revalues under currency
substitution, while another line of thought poses
that real exchange rate appreciation will occur.
Evidence from Mexico in the last decade of the 20th
Century is presented in this text to contribute to
the debate.