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The Pros and Cons of Full Dollarization

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  • Eduardo Borensztein
  • Andrew Berg

Abstract

We analyze the costs and benefits of full dollarization compared to its closest alternative, a currency board, quantifying for Argentina where possible. Potential advantages include lower borrowing costs and deeper integration into world markets. One cost is the transfer of seigniorage to the United States. The country may also lose the “exit option” to devalue in the face of major shocks. Similarly, even a country with a currency board may lose some ability to act as lender of last resort to the banking system. We review how various country characteristics influence the balance of arguments.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 00/50.

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Length: 32
Date of creation: 01 Mar 2000
Date of revision:
Handle: RePEc:imf:imfwpa:00/50

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Related research

Keywords: Dollarization; Exchange rate regimes; exchange rate; bonds; currency crisis; currency risk; real exchange rate; exchange rates; currency crises; bond; financial system; exchange rate regime; brady bonds; nominal exchange rate; denominated bonds; bilateral real exchange rate; eurobonds; foreign exchange; exchange rate policy; currency boards; bilateral exchange rates; financial markets; international capital; present value; rediscounts; international banks; financial sector; reserve requirements; brady bond; real exchange rates; eurobond; bond spreads; international capital movements; exchange rate fluctuations; bilateral exchange rate; treasury bond; international reserves; domestic interest rates; denominated bond; floating exchange rate; treasury bonds; exchange reserves; government bonds; currency devaluations; exchange rate volatility; exchange rate pegs; foreign exchange reserves; exchange rate risk; fixed exchange rate; nominal devaluation; exchange rate realignment; exchange rate change; exchange rate movements; international financial markets; eurobond market; effective exchange rate; stabilization programs; real exchange rate fluctuations; financial intermediation; financial assets; real exchange rate volatility; exchange rate peg; exchange rate flexibility; exchange rate arrangements; sovereign bonds; currency mismatch; exchange rate adjustments; currency substitution; exchange rate changes; bank rediscounts; exchange rate appreciation; international capital markets; international financial statistics; exchange rate adjustment; domestic financial system; financial resources; yields on bonds; exchange rate arrangement; international finance; floating exchange rates; real effective exchange rate; indexed bonds; financial systems; liquidity support; stock of money; currency regime;

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  1. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 544, Board of Governors of the Federal Reserve System (U.S.).
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