Reflections on Dollarization

Reinhart, Carmen and Calvo, Guillermo (2001): Reflections on Dollarization. Published in: in Alberto Alesina and Robert Barro (eds.), Currency Unions (Stanford: Hoover Institute Press, 2001) (2001): pp. 39-47.

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.

• Item Type: MPRA Paper
• Language: English
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions

References

Calvo, Guillermo, and Carmen M. Reinhart,“Fixing for Your Life,” (with Guillermo A. Calvo) in Susan Collins and Dani Rodrik, eds. Brookings Trade Forum 2000 (Washington, DC: Brookings Institution, 2000), 1-39. Calvo, Guillermo, and Carmen M. Reinhart,“Fear of Floating,” . Quarterly Journal of Economics, Vol. CXVII No. 2, May 2002, 379-408.