Reflections on Dollarization

Carmen Reinhart () and Guillermo Calvo

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

JEL-codes: E52 F33 (search for similar items in EconPapers)
Date: Written 2001
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