In his recent blog post, John H. Cochrane primarily explores the procedural aspects of dollarization. However, my focus is on understanding the underlying reasons or the "why" behind such a move.
Cochrane raises a questionable point regarding what he terms the "standard of value." Disagreeing with his perspective, it seems illogical for Argentina to express values, even for identical items like Big Macs, in the same currency units. The ease of comparison doesn't significantly impact decision-making, not even in international trade. For instance, when considering the additional cost to soybean exporters comparing the dollar value exported to their costs stated in either dollars or pesos, the difference is negligible. It's important to note that while weights and measures are constant, the values of currencies relative to others are not.
The inherent value of possessing a national currency lies in a central bank's ability to engineer optimal inflation for its country. The current performance of the US Federal Reserve serves as an example, despite a minor deviation in 2021. Aligning the optimal inflation for the US with that of Argentina, given its unique shocks, seems improbable. In a small economy, inflation has limited influence on relative prices compared to larger economies like Argentina, which stands out among Panama, El Salvador, or Ecuador—countries that have opted for dollarization.
Cochrane's primary argument for preferring Dollarization is its potential to shield against shocks from fiscal policy, provided it receives sustained political support. Importing US inflation to eliminate the impact of detrimental fiscal policies might be justified, even if sub-optimal for addressing Argentina-specific shocks.
However, Cochrane's example of Greece during the Euro crisis, constrained by "bad" fiscal policy, serves as a cautionary tale. Greece needed expansionary monetary policy and inflation during the crisis, emphasizing the importance of flexibility. What if Argentina faces a significant decline in agricultural export prices but cannot devalue due to dollarization?
While Cochrane's discussion on the procedural aspects appears robust, his apparent lack of awareness of the downsides for Argentina in importing inflation optimized for the US, coupled with a lack of explicit consideration of costs alongside benefits, warrants careful consideration.
Thank you for reading Radical Centrist! Feel free to subscribe for free to receive new posts and share with others.
ur stile is not so readable
friendly tip - maybe run it through chatgpt
heere i did it for you
Title: "Analyzing Dollarization in Argentina - A Critical Examination of Cochrane's Perspective"
Date: November 27, 2023
Author: Thomas L. Hutcheson
Link to the article: [https://johnhcochrane.blogspot.com/2023/11/pro-dollarization.html](https://johnhcochrane.blogspot.com/2023/11/pro-dollarization.html)
In his recent blog post, John H. Cochrane primarily explores the procedural aspects of dollarization. However, my focus is on understanding the underlying reasons or the "why" behind such a move.
Cochrane raises a questionable point regarding what he terms the "standard of value." Disagreeing with his perspective, it seems illogical for Argentina to express values, even for identical items like Big Macs, in the same currency units. The ease of comparison doesn't significantly impact decision-making, not even in international trade. For instance, when considering the additional cost to soybean exporters comparing the dollar value exported to their costs stated in either dollars or pesos, the difference is negligible. It's important to note that while weights and measures are constant, the values of currencies relative to others are not.
The inherent value of possessing a national currency lies in a central bank's ability to engineer optimal inflation for its country. The current performance of the US Federal Reserve serves as an example, despite a minor deviation in 2021. Aligning the optimal inflation for the US with that of Argentina, given its unique shocks, seems improbable. In a small economy, inflation has limited influence on relative prices compared to larger economies like Argentina, which stands out among Panama, El Salvador, or Ecuador—countries that have opted for dollarization.
Cochrane's primary argument for preferring Dollarization is its potential to shield against shocks from fiscal policy, provided it receives sustained political support. Importing US inflation to eliminate the impact of detrimental fiscal policies might be justified, even if sub-optimal for addressing Argentina-specific shocks.
However, Cochrane's example of Greece during the Euro crisis, constrained by "bad" fiscal policy, serves as a cautionary tale. Greece needed expansionary monetary policy and inflation during the crisis, emphasizing the importance of flexibility. What if Argentina faces a significant decline in agricultural export prices but cannot devalue due to dollarization?
While Cochrane's discussion on the procedural aspects appears robust, his apparent lack of awareness of the downsides for Argentina in importing inflation optimized for the US, coupled with a lack of explicit consideration of costs alongside benefits, warrants careful consideration.
Thank you for reading Radical Centrist! Feel free to subscribe for free to receive new posts and share with others.
Thanks. This seems like a good suggestion.