Dollarization and Hyperinflation

A prevalent concern surrounding Argentina’s potential dollarization is the fear that its implementation might trigger hyperinflation. However, I find this concern perplexing. Argentina stands on the precipice of hyperinflation due to years of monetary mismanagement. Contrary to the common belief that dollarization would escalate the risk, it is, in fact, a consequence of Argentina once again heading toward hyperinflation. Argentines are trying to run away from hyperinflation, even if that means dollarization.

I delve into this matter in my recent column for AIER’s Sound Money Project. However, there's a caveat to consider. In this piece, I draw a comparison between Cagan’s definition of hyperinflation and current inflation standards, estimating a monthly rate of approximately 10%. But, the crux of the matter lies in identifying the inflation rate at which money demand becomes unresponsive to the interest rate. This threshold is lower today than it was when Cagan wrote his paper as well.

Following Sunday’s election results, Javier Milei is set to become the president of Argentina on December 10. Among other things, president-elect Milei has vowed to replace the peso with the US dollar, a policy known as dollarization. Some critics have argued that dollarization will deplete the Argentine central bank’s US dollar reserves, which would make dollarization prohibitively expensive and ultimately result in hyperinflation. In leveling this criticism, however, they misinterpret Argentina’s current economic situation and fail to consider real-world cases of dollarization during inflationary crises.

The risk of hyperinflation in Argentina is not due to Javier Milei’s advocacy for dollarization. Instead, it results from years of unsound monetary policies. Inflation has been steadily increasing since 2007, well before Milei proposed dollarizing (and well before nearly anyone in Argentina thought dollarization likely).

Continue reading at the Sound Money Project.