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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. 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.
    2. 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.
    3. Gianni De Nicoló & Patrick Honohan & Alain Ize, 2003. "Dollarization of the Banking System: Good or Bad?," IMF Working Papers 03/146, International Monetary Fund.
    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. repec:imf:imfwpa:02/188 is not listed on IDEAS
    6. Gerald Caprio & Michael Dooley & Danny Leipziger & Carl Walsh, 1996. "The lender of last resort function under a currency board: The case of Argentina," Open Economies Review, Springer, vol. 7(1), pages 625-650, March.
    7. Francois R. Velde & Marcelo Veracierto, 1999. "Dollarization in Argentina," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Jun.
    8. repec:imf:imfwpa:00/50 is not listed on IDEAS
    9. Aaron Tornell & Andres Velasco, 1995. "Fixed versus Flexible Exchange Rates: Which Provides More Fiscal Discipline?," NBER Working Papers 5108, National Bureau of Economic Research, Inc.
    10. Rudi Dornbusch, 2001. "Fewer Monies, Better Monies," NBER Working Papers 8324, National Bureau of Economic Research, Inc.
    11. repec:imf:imfwpa:04/66 is not listed on IDEAS
    12. 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.
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