The Pros and Cons
Andrew Berg, Eduardo Borensztein
©2000 International Monetary Fund
[Preface] [The Pros and Cons of Full Dollarization]
[Questions About Pegs] [The Appeal of Dollarization]
[The Risk Premium] [Seigniorage] [Stability]
[Effect on Trade and Financial Links] [Exit Option]
[Lender of Last Resort Function and Financial System Stability] [Conclusions] [Author Information]
The Economic Issues Series aims to make available to a broad readership of nonspecialists some of the economic research being produced on topical issues by the International Monetary Fund. The series draws mainly from IMF Working Papers, technical papers produced by IMF staff members and visiting scholars, as well as from policy-related research papers. The following paper draws on material originally contained in IMF Working Papers 00/50 and 00/29, respectively, "The Pros and Cons of Full Dollarization" and "The Choice of Exchange Rate Regime and Monetary Target in Highly Dollarized Economies," both by Andrew Berg and Eduardo Borensztein. Readers may purchase these papers for $10 each from IMF Publication Services. Charles S. Gardner prepared this version.
The Pros and Cons of Full Dollarization
Since the end of the Bretton Woods system of fixed exchange rates nearly thirty years ago, the old dilemma facing countries of finding workable currency exchange arrangements has become more challenging, and the choices have become more varied. The decision about which exchange rate system to adopt has become more difficult as world trade and capital markets have become more integrated. New problems have emerged, and with them, new answers to the question of the best exchange regime to promote each country's development objectives. The newest of these solutions is full dollarization, under which a country officially abandons its own currency and adopts a more stable currency of another country—most commonly the U.S....