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Official dollarization : a last resort solution to financial instability in Latin America ?

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  • Alexandre MINDA (LEREPS-GRES)

Abstract

This paper will analyse the debate about official dollarization in Latin America. Because of the opportunity cost of dollarization, replacing a national currency by a foreign currency is a solution of last resort to the financial instability of emerging economies. 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 complete 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 that have adopted this exchange regime, the limits of adopting such a solution are underlined, particularly by the fact that the disappearance of national currencies implies an abandonment of monetary sovereignty and a loss of a powerful symbol of national assertion and identity.

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Bibliographic Info

Paper provided by Groupement de Recherches Economiques et Sociales in its series Cahiers du GRES with number 2005-02.

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Date of creation: 2005
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Handle: RePEc:grs:wpegrs:2005-02

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Web page: http://gres.u-bordeaux4.fr/
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Related research

Keywords: Dollarization; Latin America; exchange rate regime; monetary sovereignty;

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References

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  1. Calvo, Guillermo A, 2001. "Capital Markets and the Exchange Rate with Special Reference to the Dollarization Debate in Latin America," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 312-34, May.
  2. Roberto Chang & Andres Velasco, 1998. "Financial Fragility and the Exchange Rate Regime," NBER Working Papers 6469, National Bureau of Economic Research, Inc.
  3. Masson, Paul R., 2001. "Exchange rate regime transitions," Journal of Development Economics, Elsevier, vol. 64(2), pages 571-586, April.
  4. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  5. William C. Gruben & Mark A. Wynne & Carlos E.J.M. Zarazaga, 2001. "Dollarization and monetary unions: implementation guidelines," Center for Latin America Working Papers 0201, Federal Reserve Bank of Dallas.
  6. Francois R. Velde & Marcelo Veracierto, 1999. "Dollarization in Argentina," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Jun.
  7. Jérôme Sgard, 2003. "Hyperinflation and the Reconstruction of a National Money: Argentina and Brazil, 1990-2002," Working Papers 2003-01, CEPII research center.
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Cited by:
  1. Bedri Kamil Onur Tas & Selahattin Togay, 2008. "Effect of Dolarization on Macroeconomic Performance and Money-Price Relationship in Ecuador," Working Papers 0808, TOBB University of Economics and Technology, Department of Economics.

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