This paper identifies key aspects that countries willing to officially dollarize must necessarily address. Based on country experiences, it discusses the critical institutional bases that are necessary to unilaterally introduce a new legal tender, describes the relevant operational issues to smooth the transition toward the use of the new currency, and identifies key structural reforms that are necessary to favor the sustainability over time of this monetary regime. The paper is aimed at providing preliminary guidance to policy makers and practitioners adopting official dollarization. The paper does not take a position on how appropriate this monetary arrangement is. Experiences from adopting dollarization in Ecuador, El Salvador, Kosovo, Montenegro, and Timor-Leste are illustrated briefly.
This paper identifies key aspects that countries willing to officially dollarize must necessarily address. Based on country experiences, it discusses the critical institutional bases that are necessary to unilaterally introduce a new legal tender, describes the relevant operational issues to smooth the transition toward the use of the new currency, and identifies key structural reforms that are necessary to favor the sustainability over time of this monetary regime. The paper is aimed at providing preliminary guidance to policy makers and practitioners adopting official dollarization. The paper does not take a position on how appropriate this monetary arrangement is. Experiences from adopting dollarization in Ecuador, El Salvador, Kosovo, Montenegro, and Timor-Leste are illustrated briefly.
Seminar paper from the year 2008 in the subject Economics - Finance, grade: 90, , course: International Trade Seminar, language: English, abstract: The purpose of this paper is to explore dollarization, specifically the type that involves the adoption of the U.S. Dollar as official currency by foreign nations. An overview of the definition of dollarization will be given along with an analysis of the motivation to dollarize and one economist’s process of dollarization. Cases of countries that have officially dollarized to the U.S. Dollar will be identified and explored in detail. The pros and cons to these foreign countries will also be summarized and directions for future research will be given. Dollarization is not a recent occurrence in the international community, but with the official adoption of the U.S. Dollar by several countries over the last decade, it has gained significant attention. Governments, international organizations such as the U.N., the World Bank, The International Monetary Fund, as well as economists and other scientists have all over the past ten years been paying far more attention than previously to dollarization. First, a complete definition and brief history of dollarization will be presented followed by the motivating factors behind a nation’s decision to dollarize. One economist’s process for dollarization is also presented. Next, some Pros and Cons are summarized followed by an overview of the example nations that have dollarized will be given followed by the beginning of my focus on Latin America as a region apparently prone to dollarization and why. The balance of the paper will be devoted to two case studies presenting in depth information about two Latin American countries that have officially adopted the U.S. Dollar, El Salvador, and Ecuador. Finally, directions for future research are presented.
The Cato Institute, a public policy research foundation in Washington, D.C., presents an article entitled "Official Dollarization: Current Experiences and Issues," by Zeljko Bogetic. The article was published in the Fall 2000 issue of "The Cato Journal." The author discusses dollarization, a portfolio shift away from domestic currency to foreign currency to fulfill the main functions of money. The worldwide trend toward greater regional integration is promising for full dollarization, because it reduces the perceived loss of national sovereignty from adopting a foreign currency.
Official dollarization refers to the adoption of the United States dollar as legal tender in place of the national currency. Some Latin American countries have recently dollarized, and others have seriously considered dollarization. This article discusses the reasons behind the surge of interest in dollarization and provides a review of the new academic literature on the topic. It discusses in detail some of the factors that are commonly considered to be the important costs and benefits of dollarizing. The paper also provides an analysis of the existing liability dollarization in several countries and its relation with official dollarization. Finally, it briefly looks at dollarization from the perspective of the United States.
This paper makes a comparison between official dollarization and the classic gold standard by studying the effects of both on trade. Under this scheme, I have been able to assess the cases of Ecuador and El Salvador: two contemporary examples of official dollarization. In the case of Ecuador, it happened in 2000 after a financial crisis and for El Salvador it occurred when the country was under stable macroeconomic conditions in 2001. One of the benefits of the classic gold standard was its effects on trade, the same happening with official dollarization. Through a synthetic control analysis, I show the benefits of official dollarization in trade under the common currency framework. Results for Ecuador show that official dollarization has increase bilateral trade with the US by 43% over 14 years. Results for El Salvador show an increase of bilateral trade with the US of 76% over 13 years. What drives this difference? During the classic gold standard period (1870-1914) different monetary unions were formed having diverse effects on trade. One reason for this may be business cycle coordination among members while another could be structural reforms prior to adopting the system along with institutions, these lessons may be extrapolated to dollarization.
The financial crisis in Argentina is due to various economic and non economic factors, the most significant of which are external to the country, such as the impact of the 1997- 1998 East Asian Crisis, the 1998 Russian devaluation, and the 2000- 20 01 global economic downturn. More importantly, the strategy implemented by the IMF which emphasized on a zero- deficit program after having arranged massive amount s of loans to support the country's currency was a huge mistake. In fact, Argentina's currency board system is what contributed largely to the financial crisis, as economic activity was directly reduced by the large capital outflows that were prevalent during the global financial depression alongside the increas e in the interest rates. Although the current situation of Argentina is not encouraging at all since the country is on the edge of a complete collapse and since the IMF refuses to relea se more aid to Argentina, there is reason to believe that the economy is able to recover without external financing, aided by privatization, deregulation of the economy, and the reforms that were implemented earlier by the government. The assessment of the criteria that make a country a good candidate for dollarization (its experience with inflation, its current exchange rate regime, the reserve coverage of monetary base, the degree of soundness of the banking system, the ex tent of unofficial dollarization, the country's inability to borrow long- term in domest ic currency, the country's fiscal record, the spread between local dollar- denomina ted and local currency- denominated interest rates, trade integration with the U.S., fl exibility of labor markets, degree of capital mobility, political factors) suggests that the implementation of an official dollarization in Argentina could be an effective p lan. After comparing Lebanon with Argentina, we listed a number of options that we think Argentina has to analyze and to draw a well designed recovery plan from in order for it to rise from its collapse. These recommendations include: a full do llarization program; reduction of government expenditures and taxes; implementation of a mor e flexible exchange rate; encouragement of free trade; finding ways to restore pub lic confidence in the banking system to stop the flight of capital.
Analyzes the costs and benefits of full dollarization, or the adoption by one country of another country's currency. Potential advantages include lower borrowing costs and deeper integration into world markets. But countries lose the ability to devalue, and become dependent on the U.S. Compares with currency board option.
