Introduction

Abstract

The Latin American monetary experience over the last several decades has posed a multitude of questions for traditional monetary theory. First, the basic propositions of the relationship between the quantity of money, the rate of inflation and the rate of exchange depreciation do not seem, at least at a superficial level, to hold (see Vogel (1974)). Secondly, stabilization policy seems to result in increased rather than decreased inflation in many cases (see Sjaastad (1983) and Calvo (1983)). Third, with very high rates of inflation and very large negative real interest rates on domestic currency and nominally denominated domestic assets, the local currency is still being used (see Nickelsburg (1986b), Canto (1985)). Fourth, the velocity of money appears to be much more volatile than previously thought (McNelis and Nickelsburg (1986)). In this book we attempt to address these issues by reformulating monetary theory for a set of economies which have particularly tenuous monetary equilibria, tenuous because of their size, involvement in international trade and political credibility, and apply this theory to the experiences of four countries in Latin America; The Dominican Republic, Argentina, Venezuela and Ecuador.