International Business
Capstone project

Submitted to: Dr. Steven Wright

May 5th, 2010

Dollarization, good or bad?

Roland Salameh (7964)


Exchange rate regimes occupy a central place in national economies and in the global economy. Dollarization, seen as an instrument against the volatile currency situation and the fluctuating exchange rate hasgradually become an option for ending the crisis recommended by experts and international financial institutions, particularly in countries in trouble . Dollarization can be full or partial. Ultimate, it involves the abandonment of national monetary sovereignty and the adoption of a foreign currency. Partially, it involves the simultaneous use of the national currency and a currency in the currencypractices of different countries.
Thus, dollarization is not only the exclusive use of the dollar. Similarly it does not indicate the degree of penetration of foreign currency in the national economy. However, the dollar remains the primary reserve currency billing and wording in financial transactions. And despite its fluctuations that cause strong repercussions on the global economy.
Indeed,before the Second World War, the financial world was none other than London, which relied on the strength of the pound sterling. If in the 70s, the conversion was the gold standard of the international monetary system, regulated by the Breton Woods institutions, the suspension of convertibility in 1971 led to the loss of the dollar’s role as a reference.
The dollar continues to play a leadinginternational role that goes along with the centrality of the U.S. economy in the system of trade intermediaries.
In the 80s, the interest savings focused on the role of exchange rate adjustments in programs to stabilize inflation. The old debates focused on the partial integration of the dollar in the national economy. However in the 90s, with globalization and free movement of capital, manyfinancial crises around the world happened, causing serious consequences. It is in this context that the debate move on the issue of full dollarization, a radical solution to the crisis especially recommended for developing countries. Today, dollarized economies are far from being isolated. Many countries in Latin America, for example, have resorted to full dollarization in order to put an end toserious economic crises, social, political, as was the case in Argentina, and Ecuador.
We will focus initially on issues and principles of dollarization, before seeing a second time the benefits of dollarization.

I-Dollarization: Principles and Issues

1-The partial dollarization:

1.a Causes:

The dollarization is the use of a foreign currency alongside the national currency. Besides thedegree of penetration of foreign currency which varies from one economy to another, it is possible to readily distinguish between an unofficial dollarization (de facto) and official dollarization (de jure). The first refers to situations in which dollarization is a choice of private agents, which in turn may result from various factors. Indeed, despite the absence of legal tender, the degree ofdollarization may increase due to currency practices of private agents.
The official dollarization refers to the institutionalization, that is to say, the fact of giving a legal tender in foreign currency: the abandonment of the sovereignty of the national currency shall be exercised by monetary authorities who actively manage the transition to new exchange rate regime.

The most successfulscheme is the de facto dollarization. In general, this plan reflects a situation of instability in the country, either politically or economically, which gives rise to pessimistic, and after applying for the use of a stable currency.
Indeed, in times of crises, wars or armed conflicts, confidence in the currency deteriorates. Consequently, private agents are quick to convert their deposits and…