Dollarization

Worldwide use of the U.S. dollar and the euro:
  United States
  External adopters of the US dollar
  Currencies pegged to the US dollar
  Currencies pegged to the US dollar within narrow band
  External adopters of the euro
  Currencies pegged to the euro
  Currencies pegged to the euro within narrow band
Worldwide official use of foreign currency or pegs:
  U.S. dollar users, including the United States
  Currencies pegged to the US dollar
  Euro users, including the Eurozone
  Currencies pegged to the Euro

  Australian dollar users, including Australia
  New Zealand dollar users, including New Zealand
  South African rand users (CMA, including South Africa)
  Indian rupee users and pegs, including India
  Pound sterling users and pegs, including the United Kingdom

  Special Drawing Rights or other currency basket pegs
  Three cases of a country using or pegging the currency of a neighbor

Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency. The term is not only applied to usage of the United States dollar, but generally to the use of any foreign currency as the national currency.

The biggest economies to have officially dollarized as of June 2002 are Panama (since 1904), Ecuador (since 2000), and El Salvador (since 2001). As of August 2005, the United States dollar, the Euro, the New Zealand dollar, the Swiss franc, the Indian rupee, and the Australian dollar were the only currencies used by other countries for official dollarization. In addition, the Armenian dram, Turkish lira, the Israeli shekel, and the Russian ruble are used by internationally unrecognized but de facto independent states.

Contents

Origins

After the gold standard was abandoned at the outbreak of World War I and the Bretton Woods Conference following World War II, some countries were desperately seeking ways to promote global economic stability and hence their own prosperity. Countries usually peg their currency to a major convertible currency. When countries choose to use a major convertible currency parallel to or in place of their national currency, this is called the process of dollarization.

Effects of dollarization

The major benefit of dollarization is the elimination of risk of exchange rate fluctuations and possible reduction in the country's international exposure. Though dollarization cannot eliminate the risk of an external crisis, it provides steadier markets as a result of elimination of fluctuations in exchange rates. Dollarized economies can invoke greater confidence among international investors inducing increased investments and growth. Economic integration with the rest of the world becomes easier as a result of lowered transaction costs and greater acceptability of the dollarized currency. It helps promote greater fiscal discipline and thus greater financial stability and lower inflation.

On the other hand, dollarization leads to loss of revenue by seigniorage, is almost certainly met by political resistance and most importantly leads to absence of monetary policy autonomy. The country losses the rights to its autonomous monetary as well as exchange rate policies even in times of financial emergencies. [IMF 1] [1] [2]

Types

Dollarization can occur in a number of situations. It can be used unofficially, when private agents prefer the foreign currency over the domestic currency. For example, they hold deposits in the foreign currency because of a bad track record of the local currency, or as a hedge against inflation of the domestic currency.

It can be used semiofficially (or officially bimonetary systems), where the foreign currency is legal tender alongside the domestic currency.

Some countries use a foreign currency as the sole legal tender, and have ceased to issue the domestic currency. Another effect of a country adopting a foreign currency as its own is that the country gives up all power to vary its exchange rate, with its economy being pegged to that of the foreign country.

U.S. dollar

Countries using the U.S. dollar exclusively

Countries using the U.S. dollar alongside other currencies

Euro

New Zealand dollar

Australian dollar

South African rand

Zimbabwe

Due to the hyperinflation and official abandonment of the Zimbabwean dollar several currencies are used instead:

The U.S. dollar has been officially adopted for all transactions involving the new power-sharing government.

Others

See also

Notes

  1. ^ Berg, Borenzstein, Andrew, Eduardo. "Full Dollarization The Pros and Cons". Full dollarization. IMF. http://www.imf.org/external/pubs/ft/issues/issues24/index.htm. Retrieved 13 October 2011. 

References

  1. ^ Broda, Levy Yeyati, Christian, Eduardo. "Endogenous deposit dollarization". Federal Reserve Bank of New York. http://ideas.repec.org/p/fip/fednsr/160.html. 
  2. ^ Levy Yeyati, Eduardo. "Liquidity Insurance in a Financially Dollarized Economy, NBER Working Papers 12345". National Bureau of Economic Research, Inc.. http://ideas.repec.org/p/nbr/nberwo/12345.html. 

External links


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Look at other dictionaries:

  • dollarization — dol‧lar‧i‧za‧tion [ˌdɒləraɪˈzeɪʆn ǁ ˌdɑːlərə ] also dollarisation noun [uncountable] ECONOMICS 1. when people in countries outside the US prefer to use the dollar, rather than their country s own currency: • High inflation has led many Russians… …   Financial and business terms

  • dollarization — (Amer.) n. use of U.S. dollars by a country as its official currency (also dollarisation) …   English contemporary dictionary

  • Dollarization — A situation where the citizens of a country officially or unofficially use a foreign country s currency as legal tender for conducting transactions. The main reason for dollarization is because of greater stability in the value of the foreign… …   Investment dictionary

  • dollarization — The adoption by a country of the US dollar in place of its own currency, usually as a means of controlling inflation and interest rate volatility. Partial dollarization is said to occur when a country gives the US dollar equal status to its own… …   Accounting dictionary

  • dollarization — The adoption by a country of the US dollar in place of its own currency, usually as a means of controlling inflation and interest rate volatility. Partial dollarization is said to occur when a country gives the US dollar equal status to its own… …   Big dictionary of business and management

  • dollarization — noun Date: 1982 the adoption of the United States dollar as a country s official national currency • dollarize verb …   New Collegiate Dictionary

  • dollarization — /dol euhr euh zay sheuhn/, n. the conversion of a country s currency system into U.S. dollars. [1985 90] * * * …   Universalium

  • dollarization — noun The process of a country adopting the US dollar or other foreign currency in parallel to or instead of the domestic currency. Making dollarisation work requires structural reform, something President Noboa has failed to achieve. Ecuadors… …   Wiktionary

  • dollarization — dol|lar|i|za|tion [ˌdɔləraıˈzeıʃən US rə ] n [U] technical a situation in which countries outside the US want to use the dollar rather than their own country s money …   Dictionary of contemporary English

  • dollarization — or dollarisation noun 1》 the process of aligning a country s currency with the US dollar. 2》 the dominating effect of the US on a country s economy …   English new terms dictionary


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