Dollarization: Analytical Issues

Roberto Chang and Andres Velasco

No 8838, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper discusses major analytical aspects of dollarization and their practical implications. We develop a simple model to stress that dollarization implies the loss of independent monetary policy and of seigniorage, yet the significance of such losses can only be evaluated in conjunction with assumptions about the policymaking process. If the government is benevolent and has no credibility problems, dollarization causes a fall in welfare, which can be measured by the implied seigniorage loss or using Mundellian optimal currency area criteria. However, outcomes are rather different if credibility is absent and dollarization can serve as a commitment device: the welfare impact of dollarization is ambiguous, and seigniorage measures and Mundellian criteria may be misleading indicators of the true cost of dollarization. We also evaluate other implications of dollarization, such as those related to last resort lending and financial stability.

JEL-codes: E42 F41 (search for similar items in EconPapers)
Date: 2002-03
New Economics Papers: this item is included in nep-ifn, nep-lam and nep-mon
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

Published as Sturzenegger, Federico and Eduardo Levy-Yeyati (eds.) Dollarization. Cambridge, MA: MIT Press, 2002.

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