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Should Argentina Adopt The US Dollar?

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  • Hughes Hallett, Andrew
  • Myrvin, Anthony

Abstract

A popular suggestion among emerging or transition economies is to 'dollarize' or 'euro-ize'; that is to adopt the currency of a larger, richer neighbour in order to import the monetary discipline and financial stability of that neighbour. This paper examines the pros and cons of that suggestion in Argentina, where it has become a serious political concern. We argue that the usual Optimal Currency Area criteria, while important, may not be the dominant consideration where a currency board, or where exchange rate fixing or stabilization, is the natural alternative. This is because such a fixing arrangement creates risk premia against the possibility that the exchange rate parity cannot be maintained, and against the possibility that the domestic economy will be unable or unwilling to fund the bonds, securities or reserves used to back the domestic currency issue. We find the growth and investment benefits of removing the risk premia outweigh any optimal currency area difficulties. But that produces its own difficulties in that there may be a conflict between the need to develop an economy's real side, which depends on the optimal currency area criteria, and the conditions of financial stability needed to realize that developments depend on the discipline effects from outside that currency area.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2412.

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Date of creation: Apr 2000
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Handle: RePEc:cpr:ceprdp:2412

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Keywords: Credibility; Dollarization; Risk Premium; Seigniorage;

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References

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  1. Fischer, Stanley, 1982. "Seigniorage and the Case for a National Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(2), pages 295-313, April.
  2. Barro, Robert J., 1982. "Measuring the Fed's revenue from money creation," Economics Letters, Elsevier, vol. 10(3-4), pages 327-332.
  3. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(449), pages 1009-25, July.
  4. Giavazzi, Francesco & Pagano, Marco, 1988. "The advantage of tying one's hands : EMS discipline and Central Bank credibility," European Economic Review, Elsevier, vol. 32(5), pages 1055-1075, June.
  5. Herrendorf, Berthold, 1997. " Time Consistent Collection of Optimal Seigniorage: A Unifying Framework," Journal of Economic Surveys, Wiley Blackwell, vol. 11(1), pages 1-46, March.
  6. Daniel Gros & Guyvandille, 1995. "Seigniorage and EMU: The Fiscal Implications of Price Stability and Financial Market Integration," Journal of Common Market Studies, Wiley Blackwell, vol. 33(2), pages 175-196, 06.
  7. Bayoumi, Tamim & Eichengreen, Barry, 1996. "Operationalizing the Theory of Optimum Currency Areas," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1484, C.E.P.R. Discussion Papers.
  8. Klein,Martin & Neumann,Manfred, . "Seignorage: What is it and who gets it?," Discussion Paper Serie B 124, University of Bonn, Germany.
  9. Auernheimer, Leonardo, 1974. "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(3), pages 598-606, May/June.
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Cited by:
  1. Alessandro Rebucci & Fabio Ghironi, 2002. "Monetary Rules for Emerging Market Economies," IMF Working Papers 02/34, International Monetary Fund.

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