Reflections on Dollarization
During the past few years, many emerging market countries have suffered severe currency and banking crises. A popular view blames fixed exchange rates--specifically, soft pegs--for these financial meltdowns. Indeed, fixed exchange rates have been so demonized by some adherents to that view that the only alternative for emerging markets seems to be to allow their currencies to float. Other analysts draw a very different lesson from these events. After all, a country cannot have a currency crisis if it does not have a domestic currency in the first place; firms, banks, and households are immune to currency mismatches if all assets and liabilities are denominated in the same currency. The obvious policy recommendation that follows is that full dollarization may, in some cases, be desirable. Some observers forecast that intermediate exchange rate regimes will vanish, as countries move toward corner solutions--with freely-floating exchange rate regimes at one end, hard pegs, such as currency boards or dollarization, at the other. Thus, the current circumstances provide the ingredients for a rich policy debate.
|Date of creation:||2001|
|Date of revision:|
|Publication status:||Published in in Alberto Alesina and Robert Barro (eds.), Currency Unions (Stanford: Hoover Institute Press, 2001) (2001): pp. 39-47|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
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- Guillermo A. Calvo & Carmen M. Reinhart, 2000.
"Fear of Floating,"
NBER Working Papers
7993, National Bureau of Economic Research, Inc.
- Reinhart, Carmen & Calvo, Guillermo, 2001.
"Fixing for your life,"
13873, University Library of Munich, Germany.
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