Full Dollarization: A Last Resort Solution to Financial Instability in Emerging Countries?

Abstract

This paper will examine the question of official dollarization. To clarify the discussion, a taxonomy of dollarization regimes is drawn up in order to make an inventory of officially dollarized countries, territories and dependencies. The foundations for adopting full dollarization are analysed through three elements: an account of the limits to corner solutions, the identification of the economic contexts which are favourable to the adoption of foreign currencies and the reasons behind the legitimacy crisis of national currencies. To determine what is at stake in such decisions, cost advantage analysis mentions, first of all, the expected benefits highlighted by the advocates of complete dollarization. A detailed study of its potential impact will then allow us to evaluate the induced costs of the disappearance of national currencies. Finally, by looking at emerging countries which have adopted this exchange regime, the limits of adopting such a solution are underlined, particularly by the fact that the ...