Ivan Werning on Argentina at the Crossroads: Perils of Dollarization

For the full summary follow the link: https://bcf.princeton.edu/events/ivan...

On Tuesday, November 21, Ivan Werning joined Markus’ Academy for a conversation on Argentina at the Crossroads: Perils of Dollarization. Ivan Werning is the Robert M. Solow Professor of Economics at MIT. Introductory remarks by Markus Brunnermeier.

Timestamps:
[0:00] Markus’ introduction
[6:50] Argentina at the Crossroads
[27:07] The pros and cons of dollarization
[39:17] A summary of the the perils with dollar shortages
[47:22] Details on ex ante shortages: A Chronicle of an Inflation Foretold
[1:09:27] Details on ex post shortages: Dollarization Dynamics

A summary in four bullets
The Argentinian economy has stagnated over the last four decades. With inflation reaching 140%, it is a clear case of fiscal dominance leading to inflation. After an overview of the country’s economic history, Werning presented two papers which try to highlight two challenges from dollarization not typically discussed in the literature.
The first one points out the problem of dollarizing when governments do not have enough dollars to buy back their currency at market rates. If a dollarization is announced to take place at a given date, in the leadup to the conversion we will see a devaluation of the currency and high inflation.
The second paper focuses on the problems of dollarization after implementation. If there is a scarcity of dollars among the population, dollarization will lead to sudden stop: people trying to save dollars will lead to a recession and a slow depreciation on the exchange rate.
Given these costs, it may be best to prioritize getting the deficit in order, and to worry about dollarization only after this.