The costs and the resilience of unilateral dollarization: the case of euroization in Kosovo

Jean-François Ponsot

Chapter 11 in Central Banking, Monetary Policy and the Political Economy of Dollarization, 2025, pp 277-292 from Edward Elgar Publishing

Abstract: The chapter focuses on the costs of official and full dollarization/euroization from a post-Keynesian institutionalist perspective with a special focus on the case of Kosovo. First, we clarify the notion of dollarization/euroization by using two criteria: (i) a quantitative criterion to assess the degree of dollarized/euroized monetary practices of an economy; and (ii) a qualitative – or institutional – criterion to distinguish between cases of informal dollarization/euroization and cases of official dollarization/euroization. The chapter then highlights the macroeconomic costs and constraints that euroization implies for the financial stability and growth regime of the Kosovar economy. The arguments against dollarization/euroization range from the claim that such monetary arrangements imply giving up the central bank's role as lender of last resort (LOLR), to the claims that they involve a deflationary growth dynamics, and that they slow down adjustments to external shocks. In the absence of a domestic LOLR, the banking system might be extremely vulnerable. Two institutional characteristics specific to Kosovo make it possible to cushion the weight of these macroeconomic constraints: (i) the significant presence of foreign banks; and (ii) the decisive role of the diaspora, in particular through remittances. The chapter concludes that dollarization/euroization is not sustainable without strong external financial dependence as well as monetary and financial integration with the core economy. They could make sense only for very small economies with sufficient capital inflows as well as commercial, financial and eventually political links with the core economy – like Kosovo with the prospect of one day joining the Eurozone.

Keywords: Dollarization; Central banking; Monetary policy; Euro; Kosovo (search for similar items in EconPapers)
Date: 2025
ISBN: 9781803925325
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