e 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. As dramatic and costly devaluations of national currencies became common in these crises, the popularity of official dollarization, supported by national governments, emerged as a feasible solution. With positive results immediately following adoption of this policy, either officially or unofficially, the long-term benefits and costs were beginning to be evaluated.
             One of the major benefits, modeled in a theoretical state of total dollarization, is that the possibility of currency devaluation is virtually eliminated. The threat of devaluation has been a growing concern amongst many residents and businesses, especially those holding assets in Latin American currencies in the wake of recent international financial crises, mostly defaults. As people sought protection, dollarization became a viable solution.
             Another reason for intentional dollarization is to limit the possibility of high inflation. A country that has totally dollarized has eliminated the monetary policymaking role of its central bank. Without a national currency to manage, the country's monetary policy is, in effect, put into the hands of the United States Federal Reserve. As long as the U.S. monetary policy is prudently managed, the inflation environment in the dollarized economy should remain subdued.
             A history of high inflation and policy volatility are often prevalent in nations that are partially dollarized and are often the main reasons behind dollarization in the first place. The high interest rates in such countries reflect inflation expectations, however simultaneously restrain real economic activity. By importing benign U.S. inflation, dollarized economies also import lower interest rates that often closely track U.S. rates.
             Exhibit 1 generated from research conducted by BankBoston&...