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Introducing the Euro As Legal Tender

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  • Patrick A. Imam

Abstract

In recent years, recommendations for countries to unilaterally dollarize/eurorize have become common, particularly when the countries lack economic credibility. After exploring the characteristics of dollarizing/eurorizing economies, we look at the merits and costs of unilateral eurorization for Cape Verde, a highly tourism based economy that has become increasingly integrated into the euro-zone area and that has a strong macroeconomic track record. We illustrate that neither the benefits nor the costs of unilateral eurorization are large and conclude that there is no compelling case to change the current exchange rate arrangement at this point in time. Econometrically, we assess the characteristics of dollarized economies and demonstrate that few of them apply to Cape Verde, further confirming that Cape Verde does not fit the pattern of most dollarizing countries.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/146.

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Length: 34
Date of creation: 01 Jul 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/146

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Keywords: Dollarization; Benefits; Currency pegs; Currency substitution; Exchange rate regimes; Monetary systems; exchange rate; inflation; central bank; exchange rate regime; exchange rates; monetary policy; monetary fund; fixed exchange rate; foreign exchange; exchange rate arrangements; currency units; exchange rate systems; exchange controls; flexible exchange rate; currency areas; monetary management; foreign exchange law; fixed exchange rate regimes; currency risk; exchange rate arrangement; monetary authority; demand for money; fixed exchange rates; current exchange rate; currency boards; independent monetary policy; fixed exchange rate regime; exchange rate peg; monetary union; exchange restrictions; exchange rate choice; nominal exchange rate; real exchange rate; monetary unions; monetary policy decisions; exchange arrangements; undervalued exchange rates; exchange rate system; flexible exchange rate regimes; monetary base; determinant of exchange rate; real exchange rate appreciation; exchange rate uncertainty; effective exchange rate; currency unions; liquidity management; exchange rate levels; exchange rate float; exchange rate appreciation; monetary authorities; exchange rate pegs; government securities; exchange rate risk; equilibrium exchange rate; basket of currencies; national bank; exchange rate fluctuations; exchange operations; floating exchange rate; exchange rate policy; exchange rate devaluations; floating exchange rates; monetary stability; real effective exchange rate; cost of credit; alternative exchange rate; exchange rate stability;

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  1. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  2. Eduardo Borensztein & Andrew Berg, 2000. "The Pros and Cons of Full Dollarization," IMF Working Papers 00/50, International Monetary Fund.
  3. Collins, Susan M., 1996. "On becoming more flexible: Exchange rate regimes in Latin America and the Caribbean," Journal of Development Economics, Elsevier, vol. 51(1), pages 117-138, October.
  4. Andrea Bubula & Inci Ötker, 2002. "The Evolution of Exchange Rate Regimes Since 1990," IMF Working Papers 02/155, International Monetary Fund.
  5. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  6. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
  7. Hélène Poirson, 2001. "How Do Countries Choose their Exchange Rate Regime?," IMF Working Papers 01/46, International Monetary Fund.
  8. Patrick A. Imam, 2008. "Rapid Current Account Adjustments," IMF Working Papers 08/233, International Monetary Fund.
  9. Sebastian Edwards, 1996. "The Determinants of the Choice between Fixed and Flexible Exchange-Rate Regimes," NBER Working Papers 5756, National Bureau of Economic Research, Inc.
  10. Daniel Gros, 2004. "Profiting from the Euro? Seigniorage Gains from Euro Area Accession," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 795-813, November.
  11. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 7-46, 04.
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Cited by:
  1. Patrick Imam, 2012. "Exchange Rate Choices of Microstates," The Developing Economies, Institute of Developing Economies, vol. 50(3), pages 207-235, 09.

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