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Introducing the Euro As Legal Tender; Benefits and Costs of Eurorization for Cape Verde

  • Patrick A. Imam

In recent years, recommendations for countries to unilaterally dollarize/eurorize have become common, particularly when the countries lack economic credibility. After exploring the characteristics of dollarizing/eurorizing economies, we look at the merits and costs of unilateral eurorization for Cape Verde, a highly tourism based economy that has become increasingly integrated into the euro-zone area and that has a strong macroeconomic track record. We illustrate that neither the benefits nor the costs of unilateral eurorization are large and conclude that there is no compelling case to change the current exchange rate arrangement at this point in time. Econometrically, we assess the characteristics of dollarized economies and demonstrate that few of them apply to Cape Verde, further confirming that Cape Verde does not fit the pattern of most dollarizing countries.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/146.

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Length: 34
Date of creation: 01 Jul 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/146
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  1. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
  2. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  3. Collins, Susan M., 1996. "On becoming more flexible: Exchange rate regimes in Latin America and the Caribbean," Journal of Development Economics, Elsevier, vol. 51(1), pages 117-138, October.
  4. Patrick A. Imam, 2008. "Rapid Current Account Adjustments; Are Microstates Different?," IMF Working Papers 08/233, International Monetary Fund.
  5. Sebastian Edwards, 1996. "The Determinants of the Choice between Fixed and Flexible Exchange-Rate Regimes," NBER Working Papers 5756, National Bureau of Economic Research, Inc.
  6. Andrea Bubula & Inci Ötker, 2002. "The Evolution of Exchange Rate Regimes Since 1990; Evidence From De Facto Policies," IMF Working Papers 02/155, International Monetary Fund.
  7. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  8. Eduardo Borensztein & Andrew Berg, 2000. "The Pros and Cons of Full Dollarization," IMF Working Papers 00/50, International Monetary Fund.
  9. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, 04.
  10. Hélène Poirson, 2001. "How Do Countries Choose their Exchange Rate Regime?," IMF Working Papers 01/46, International Monetary Fund.
  11. Daniel Gros, 2004. "Profiting from the Euro? Seigniorage Gains from Euro Area Accession," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 795-813, November.
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