Estimation of dollar currency in Venezuela using a time-series model

Abstract

The Venezuelan economy has been experiencing a de facto or informal dollarization that is deepening more and more as time goes by. The causes of this phenomenon lie in the progressive loss of all the properties of the local currency: first as a store of value, then as a unit of account and finally as a medium of exchange. This loss of properties is attributable to a prolonged period of very high inflation, which led to a long hyperinflation, during the period 2017-2021. There are no published academic studies on the dimension of the phenomenon. It is a serious problem that, in an economy with the high degree of de facto dollarization of the Venezuelan economy, economic agents do not have reliable, public estimates of the dollar circulating currency. The purpose of this paper is to demonstrate the application of an indirect time series model to estimate the amount of dollars circulating in the economy as a medium of exchange. The money demand method with inflationary expectations of Kamin and Ericsson (1993) is presented, which consists of a cointegrating regression with a ratchet variable that is recovered and used to reconstruct series estimates of the dollar as a means of payment, and a methodology is suggested for its application to the Venezuelan case.