economies is the inability of analysts to determine how many dollars are actually contained within a particular economy at any particular time. This is due in large part to the underground nature of de facto dollarization. Feige et al propose a strategy for estimating dollars in Latin American economies, and use these calculations to analyze the performance of Latin American economies. What the authors conclude is that there comes a point when de facto dollarization becomes more economically viable than a return to the nation's own currency. This is the case, they suggest, in Argentina where the exchange rate would have to shift significantly and to a level that is unlikely in the near future. As a result, some economies may find that de facto dollarization leads to official dollarization. In these situations, official dollarization is the only way that the government can gain a realistic opportunity to gain control over its currency, although this step heightens the likelihood that the benefits of maintaining a national currency, including seigniorage, will be lost permanently (Fiege et al 25).
There are three types of dollarization that have occurred within economies in Latin America, according to Quispe-Agnoli: currency board, full dollarization and mixed monetary policies. In a currency board, the nation retains its own currency but the government announces a specific exchange rate that it will honor relative to the dollar. In full dollarization, the national currency is abandoned in favor of the dollar. Hn mixed monetarx policy environments, nations may use a peg approach to achieve certain objectives, such as a specific rate of inflation, but once those objectives are achieved, the currency may be allowed to float freely again (Quispe-Agnoli 5).
Nations are moved to seek either a pegged currency or dollarization because of difficulty in managing their national currency and failing investor confidence. Excess capi...