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Is adopting Full Dollarization the solution? Looking at the evidence

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Author Info
Ilan Goldfajn () (Department of Economics PUC-Rio)
Gino Olivares
Abstract

The paper discusses the advantages and disadvantages of the full dollarization option and offers a few stylized facts and conclusions regarding the effects of full dollarization. On one hand, a full-dollarized economy delivers an impressive inflation performance and may even reduce the impact of external confidence shocks, although not external real shocks. On the other hand, full dollarization does not guarantee fiscal discipline neither the elimination of currency risk precludes default risk or the high volatility of sovereign spreads. In addition, it is not clear whether the reduction in domestic interest rates is the consequence of full dollarization or the competitive internationalized banking system.

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Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 416.

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Length: 23 pages
Date of creation: Feb 2000
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Handle: RePEc:rio:texdis:416

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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  1. Sebastian Edwards & Igal Magendzo, 2003. "A Currency of One's Own? An Empirical Investigation on Dollarization and Independent Currency Unions," NBER Working Papers 9514, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Araújo, Aloísio Pessoa de & Leon, Márcia Saraiva, 2002. "Speculative Attacks on Debts, Dollarization and Optimum Currency Areas," Economics Working Papers (Ensaios Economicos da EPGE) 446, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  3. Sebastian Edwards & I. Igal Magendzo, 2001. "Dollarization, Inflation and Growth," NBER Working Papers 8671, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Roberto Duncan, 2003. "Exploring the Implications of Official Dollarization on Macroeconomic Volatility," Working Papers Central Bank of Chile 200, Central Bank of Chile. [Downloadable!]
  5. Sebastian Edwards & I. Igal Magendzo, 2002. "Dollarization and Economic Performance: What Do we Really Know?," Working Papers Central Bank of Chile 175, Central Bank of Chile. [Downloadable!]
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  6. Márcio Valério Ronci & Misa Takebe & Nisreen Farhan & Amar Shanghavi & Jian-Ye Wang, 2008. "The Choice of Monetary and Exchange Rate Arrangements for a Small, Open, Low-Income Economy: The Case of Sao Tome and Principe," IMF Working Papers 08/118, International Monetary Fund. [Downloadable!]
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