The Dollarization of a Small Economy
Within a utility maximizing framework, the authors study the effects of repl acing the national currency with the dollar in a small, open economy. The impact effect is a drop in the levels of liquidity and wealth. The economy reaccumulat es real balances by reducing consumption and showing a trade surplus. The welfar e implications of the program depend on thesocial rate of time preference and t he inflation rate differential. The authors show that the United States can impr ove both its own welfare and that of the small country by "bribing" it into switching currencies, and study how these results change with the introduction of capital mobility. Copyright 1987 by The editors of the Scandinavian Journal of Economics.
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Volume (Year): 89 (1987)
Issue (Month): 1 ()
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