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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. Tornell, Aaron & Velasco, Andres, 1995. "Fixed Versus Flexible Exchange Rates: Which Provides More Fiscal Discipline," Working Papers 95-06, C.V. Starr Center for Applied Economics, New York University.
    2. 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.
    3. Eduardo Borensztein & Andrew Berg, 2000. "The Pros and Cons of Full Dollarization," IMF Working Papers 00/50, International Monetary Fund.
    4. Robin Brooks & Kenneth Rogoff & Ashoka Mody & Nienke Oomes & Aasim M. Husain, 2004. "Evolution and Performance of Exchange Rate Regimes," IMF Occasional Papers 229, International Monetary Fund.
    5. 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.
    6. 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.
    7. 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.
    8. Rudi Dornbusch, 2001. "Fewer Monies, Better Monies," NBER Working Papers 8324, National Bureau of Economic Research, Inc.
    9. Reinhart, Carmen & Calvo, Guillermo, 2001. "Reflections on Dollarization," MPRA Paper 8206, University Library of Munich, Germany.
    10. Francois R. Velde & Marcelo Veracierto, 1999. "Dollarization in Argentina," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Jun.
    11. Alain Ize & Andrew Powell, 2003. "Prudential Responses to De Facto Dollarization," Business School Working Papers defactodollarization, Universidad Torcuato Di Tella.
    12. 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.
    13. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
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