TY - JOUR AU - Reinhart,Carmen M. AU - Rogoff,Kenneth S. AU - Savastano,Miguel A. TI - Addicted to Dollars JF - National Bureau of Economic Research Working Paper Series VL - No. 10015 PY - 2003 Y2 - October 2003 UR - http://www.nber.org/papers/w10015 L1 - http://www.nber.org/papers/w10015.pdf N1 - Author contact info: Carmen M. Reinhart Kennedy School of Government Harvard University 79 JFK Street Cambridge, MA 02138 Tel: 617 496 8643 E-Mail: carmen_reinhart@harvard.edu Kenneth S. Rogoff Thomas D Cabot Professor of Public Policy Economics Department Harvard University Littauer Center 216 Cambridge, MA 02138-3001 Tel: 617-495-4022 Fax: 617/495-7730 E-Mail: krogoff@harvard.edu Miguel Savastano Research Dept. IMF 700 19th Street, N.W. Washington, D.C. 20431 E-Mail: msavastano@imf.org AB - Dollarization, in a broad sense, is increasingly a defining characteristic of many emerging market economies. How important is this trend quantitatively and how important is it for the conduct of monetary policy and the choice of exchange rate regimes? Though these questions have become a hot topic in both the theory and policy literature, most efforts are remarkably uninformed by evidence, in no small part because meaningful data has been lacking, except for a very narrow range of assets. This paper attempts to move the discussion forward and shed light on the critical questions by proposing a measure of dollarization that is broad both conceptually and in terms of country coverage. We use this measure to identify trends in the evolution of dollarization in the developing world in the last two decades, and to ascertain the consequences that dollarization has had on the effectiveness of monetary and exchange rate policy. We find that, contrary to the general presumption in the literature, a high degree of dollarization does not seem to be an obstacle to monetary control or to disinflation. A level of dollarization does, however, appear to increase exchange rate pass-through, reinforcing the claim that fear of floating' is a greater problem for highly dollarized economies. We also review the developing countries' record in combating their addiction to dollars. Concretely, we try to explain why some countries have been able to avoid certain forms of the addiction, and examine the evidence on successful de-dollarization. ER -