Official Dollarization Research Articles

Dollarization in Latin America: seigniorage costs and policy implications

This paper examines the seigniorage costs of official dollarization in 15 Latin American countries. We show that the total costs can be decomposed into two components: seigniorage transferred to the U.S. and seigniorage lost due to greater financial stability in the dollarized country. Results indicate that seigniorage costs and their components are significant, yet differ considerably across countries. A cluster analysis is performed to sort countries into homogenous sub-groups. At a stage with five sub-groups we find groups with increasing seigniorage burdens. At a stage with two sub-groups we can identify candidates for possible seigniorage revenue-sharing agreements with the U.S.

The Dollar Marches around the World

A great debate is taking place in many countries of the American Continent and in Central and Eastern Europe on the need and benefits of abandoning the national currency in favor of the dollar. The paper analyzes the theories of the central banking and the official dollarization and looks into the perspectives of dollarization in Latin America.

Pros and cons of official dollarization in Eastern Europe

The balance of payments barrier is the biggest obstacle to growth in Eastern Europe. This problem stems from the existence of individual national currencies which dynamically increases the risk associated with capital inflows. Capital inflow leads to both domestic growth and domestic currency real appreciation, reducing net exports to a level insufficient to service international debt obligations stemming from capital inflow. To avoid losses when capital flows are reversed, high domestic interest rates are required to stem capital outflow. Result is the decline of domestic economic activity. Adoption of foreign currency eliminates the need for net exports as the source of revenue needed to service debt obligation, hence it renders the balance of payments as an obstacle to sustained capital flows and economic growth irrelevant.

La dollarisation comme solution en dernier ressort

Ecuador has recently adopted the US dollar as legal tender. Salvador is on the verge of doing so; Guatemala and Costa-Rica are attempting at the same substitution to their own currency. But, the prospect is now more general. In other parts of the world, the dollarization progresses, too; Eastern-Timor and Kosovo have just before replaced their currency, respectively by the dollar and the mark; Balkanic countries are about to dol- larize ("euroize") their economies. Earlier, the South-African rand was substituted to the Lesotho, Swaziland and Namibie national currencies. Now we are far from the previous straight field of official dollarization. A few years ago, it concerned, except the specific case of Panama [1904], only "microscopic" territories like Pacific Island (Guam, Micronesia, etc.) or little cities as, in Europe, Andorra, Lichtenstein, Monaco or the Vatican. Now, official dollarization is quite another phenomenon. It is often presented as a general formula available to reform the International Monetary System (IMS). This solution is now proposed to replace a lot of currencies eroded by inflation, deficits, political crisis, if not by revolts and ethnic troubles. Initially, it seems quite logical to try to replace "minor currencies" by a few number of foreign currencies well identified by the markets and more credible. The main argument of this paper is precisely to discuss this prospect of dollarization used to simplify and rationalize the IMS. Before adopting this view, which seems too optimistic, it would be necessary to consider: - The sound and specific nature of dollarization as a "borrowing contact of credibility in the last resort". —The interest in dollarization, relatively to other exchange rate arrangements like Monetary Unions or Currency Boards. —A cost-benefits analysis of this substitution of a foreign currency to a local one. —An application of the dollarization formula to the Canadian dollar and Eastern Central European countries.

Latin America and the Dollar Bloc in the Twenty-first Century: To Dollarize or Not?

AbstractThe choice of exchange rate regime is a continuing challenge to Latin American policymakers, who currently face pressure to dollarize their economies. The constraints imposed by the “dollar bloc,” the informal but powerful currency bloc that ties Latin America to the dominant currency, are central to that choice. Current weak economic performance has called the bloc's norms and principles into question and has made the exchange rate an open issue. Ecuador's full official dollarization is one possible strategy for countries with political stability but poor economic performance to gain access to needed dollar resources. Most of Latin America, however, will continue with variants of managed floating exchange rates, and the periodic foreign exchange crises will provide access to official dollar resources and facilitate renegotiation of the terms of outstanding debt.

Latin America and the Dollar Bloc in the Twenty-First Century: To Dollarize or Not?

The choice of exchange rate regime is a continuing challenge to Latin American policymakers, who currently face pressure to dollarize their economies. The constraints imposed by the “dollar bloc,” the informal but powerful currency bloc that ties Latin America to the dominant currency, are central to that choice. Current weak economic performance has called the bloc's norms and principles into question and has made the exchange rate an open issue. Ecuador's full official dollarization is one possible strategy for countries with political stability but poor economic performance to gain access to needed dollar resources. Most of Latin America, however, will continue with variants of managed floating exchange rates, and the periodic foreign exchange crises will provide access to official dollar resources and facilitate renegotiation of the terms of outstanding debt.

DOLLARIZATION FOR ARGENTINA

In January 1999, President Carlos Menem suggested replacing the Argentine peso with the U.S. dollar. President Menem's announcement has sparked a debate throughout Latin America and Eastern Europe about what has been termed “dollarization.” That debate prompted U.S. Treasury Secretary Robert Rubin to deliver a major policy speech on alternative exchange‐rate regimes on April 21, 1999 and the U.S. Senate Banking Committee to hold dollarization hearings the following day featuring Fed Chairman Alan Greenspan and Deputy Secretary of the Treasury Lawrence Summers.This article presents a case for officially dollarizing Argentina. Dollarization is not new. Unofficial dollarization is widespread in emerging market countries; in fact, as much as 70% of the stock of U.S. dollars now circulates abroad. Twenty‐eight countries and dependent territories are officially dollarized. Although official dollarization would result in Argentina losing seigniorage of about 0.22 percent of GDP, the author estimates that this cost would be more than offset by a reduction in interest rates that would increase Argentina's trend rate of GDP growth by about two percent.After debunking the most common criticisms of dollarization, the article closes by offering recommendations about the specific form of dollarization and presenting a detailed dollarization statute for Argentina. The author proposes a competitive currency regime for Argentina, one in which all foreign money would be legal tender.