Currency Substitution and the Hysteresis Effect: An Empirical Application for Argentina

Abstract

In economies with large exchange rate fluctuations and macroeconomic instability, currency substitution is a highly important phenomenon. The Argentine case is studied through the inclusion of a ratchet variable, which accounts for the hysteresis effect –irreversibility in the currency substitution process–, for 2003-2019. To that end, an ARDL (Autoregressive Distributed Lag) model was used, where it was found that the hysteresis effect is persistent in the long run. This has implications to conduct monetary policy and regarding the stability of the demand for money.

Date of presentation: 03-11-2021

Date of approval: 01-31-2022

JEL classification: C32 ; E41 ; E44