Effects of Dollarization

Dollarization ostensibly is undertaken by a government in consultation with a central bank, but there is strong evidence that dollarization occurs at a much more informal basis long before the official move is made. Sometimes called de facto dollarization, this occurs when individual businesses and investors begin to transact business in dollars in order to take advantage of the stability of the dollar relative to the volatile local currency (Feige et al 3).

Unofficial dollarization has long-term consequences for the country where it is practiced. As increasing numbers of dollars flow into and out of the country, the nation's own economic strategies are likely to lose their effectiveness since dollars comprise an increasingly large share of the economy. This can be perplexing for policy makers who might be seeking to maintain a specific inflation target or otherwise lessen

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reliance on dollarization (Cohen 5). There is also a subtle but possibly significant psychological effect from having a currency of another nation used as legal tender. This is different from having a common currency, as the European Union has done. In Ecuador, for example, citizens are subjected to American money and American symbolism; by contrast, Americans can consider the loss of national identity and even resentment that they might feel if they were using the currency of another nation (Cohen 8). Cohen does not address specific economic arguments for or against dollarization, but instead focuses on the political and psychological effects of the phenomenon and how they might influence a nation's behavior. Such effects are generally not given much attention in discussions about dollarization, and this article can help focus attention on a significantùif overlookedùaspect of dollarization. IS DOLLARIZATION THE ANSWER FOR EMERGING ECONOMIES? The analysis thus far has focused on the issue of dollarization and how it can move into an economy without the acknowledgement or control of the central bank or government. Private individuals and isolated enterprises may be the first to move into dollar-denominated assets and liabi
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Approximate Pages = 11 (250 words per page)

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