Dollarization
In the aftermath of global economic crises in Asia and Russia to threats of default by Latin American nations, there is a pursuit for better monetary arrangements that are more crisis proof. At the root of many of these problems has been policy; resulting in problems such as hyperinflation. Gradually monetary policy worldwide has progressed from fixed rates to flexible rates with the intention of developing a strategy focused on inflation targeting. Recently, however, there has even been debate over the alternative of abolishing exchange rates all together. This paper begins with an introduction of dollarization, forms in which it exists and reviews some general benefits and costs to the nations adopting this policy. In the second half, I address the growing trends of dollarization in Latin America, which have shown positive results in short term, but conclude with an evaluation of possible long term effects on Latin American and the United States.The ascent of dollarization from being a relatively neglected issue to the role of powerful economic remedy is mysterious and intriguing. Dollarization is the process in which a country adopts, in whole or in part, the U.S. dollar as its official currency. Currently Panama is t
Although dollarization may not be feasible for all economies, it would seem to benefit some. Countries with formal dollarization may never modify their nominal exchange rate, so any adverse external shock in the world economy would have to be accommodated by cuts in the nominal level of its domestic wages and prices. However, notwithstanding its potential benefits, the surrendering of monetary sovereignty entails important costs and risks that should not be overlooked. Seigniorage revenues (essentially the difference between the cost of producing and distributing paper and coins), although estimated to be less than one percent of gross domestic product in most countries are lost by the country that dollarized unless the United States decided to share part of the extra seigniorage it would obtain. One of the major benefits, modeled in a theoretical state of total dollarization, is that the possibility of currency devaluation is virtually eliminated. Therefore, the substitution of local currencies for the US dollar, though helping to avert Latin America's recurrent foreign exchange and balance of payments crisis, may simultaneously make the region more prone to banking crises and severely tight credit restrictions. However, even with the above-mentioned limitations, it can be argued that the road ahead for Latin America is nevertheless rapidly moving towards integration with the United States economy, forming a continental Monetary Union based on geography, similar to that formed in Europe. The argument is also made that countries with strong international trade and financial ties with the U. As its chairman, Alan Greenspan has said the Federal Reserve takes only into account the interests of the United States economy. Without a domestic currency, there is no possibility of a sharp depreciation, and sudden capital outflows motivated by fears of devaluation are ruled out . Chiefly in Latin America countries, residents learned to protect themselves against the loss of purchasing power of their national currencies by switching to the dollar, as inflation rates in Mexico, Israel, and Peru reaching into the triple digits . Despite the growing interest in dollarization, very little was done in terms of adopting this policy on a broad scale until the 1990s, with a sequence of crises in the emerging markets, marked by the Mexican in 1994 and followed by the 1997 crises in Asia, Russia and Brazil. This phenomenon, referred to as unofficial dollarization, became noticeable primarily in the 1980s in some countries experiencing rapid inflation.
Common topics in this essay:
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Russia Brazil,
America United,
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Currently Panama,
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