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Adopting Full Dollarization in Postconflict Economies; Would the Gains Compensate for the Losses in Liberia?

  • Liliana Schumacher
  • Jiro Honda
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    This paper discusses whether adopting the U.S. dollar as the sole legal tender could help Liberia, a postconflict economy, to boost growth and strengthen fiscal discipline. In view of the performance of exchange rate regimes in many countries and Liberia's own experience with dollarization, we conclude that Liberia should not adopt full dollarization for the following reasons: (i) the alleged benefits voiced by the proponents of dollarization, in terms of enhanced fiscal discipline and faster economic growth, are not supported by the empirical evidence; (ii) dollarization would increase the Liberian economy's vulnerability to external shocks and Liberia's social fragility; (iii) banks in fully dollarized economies face additional capitalization requirements that Liberian banks cannot meet at present; and (iv) dollarization would be costly in terms of real resources because of the loss of seigniorage.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/82.

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    Length: 25
    Date of creation: 01 Mar 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/82
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    1. Aasim M. Husain & Ashoka Mody & Nienke Oomes & Robin Brooks & Kenneth Rogoff, 2003. "Evolution and Performance of Exchange Rate Regimes," IMF Working Papers 03/243, International Monetary Fund.
    2. Anne Marie Gulde & David S. Hoelscher & Alain Ize & David Marston & Gianni De Nicoló, 2004. "Financial Stability in Dollarized Economies," IMF Occasional Papers 230, International Monetary Fund.
    3. Francois R. Velde & Marcelo Veracierto, 1999. "Dollarization in Argentina," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Jun.
    4. Michael Bordo, 1993. "The Gold Standard, Bretton Woods and other Monetary Regimes: An Historical Appraisal," NBER Working Papers 4310, National Bureau of Economic Research, Inc.
    5. Tornell, Aaron & Velasco, Andres, 2000. "Fixed versus flexible exchange rates: Which provides more fiscal discipline?," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 399-436, April.
    6. De Nicolo, Gianni & Honohan, Patrick & Ize, Alain, 2003. "Dollarization of the banking system : good or bad?," Policy Research Working Paper Series 3116, The World Bank.
    7. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
    8. Alain Ize & Andrew Powell, 2005. "Prudential Responses to de facto Dollarization," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 8(4), pages 241-262.
    9. Rudi Dornbusch, 2001. "Fewer Monies, Better Monies," American Economic Review, American Economic Association, vol. 91(2), pages 238-242, May.
    10. Guillermo J. Vuletin, 2004. "Exchange Rate Regimes And Fiscal Performance. Do Fixed Exchange Rate Regimes Generate More Discipline Than Flexible Ones?," Econometric Society 2004 North American Winter Meetings 474, Econometric Society.
    11. Eduardo Borensztein & Andrew Berg, 2000. "The Pros and Cons of Full Dollarization," IMF Working Papers 00/50, International Monetary Fund.
    12. Caprio, Gerard Jr. & Dooley, Michael & Leipziger, Danny & Walsh, Carl, 1996. "The lender of last resort function under a currency board : the case of Argentina," Policy Research Working Paper Series 1648, The World Bank.
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