NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Dollarization: Analytical Issues

Roberto Chang, Andres Velasco

NBER Working Paper No. 8838
Issued in March 2002
NBER Program(s):   IFM

This paper discusses major analytical aspects of dollarization and their practical implications. We develop a simple model to stress that dollarization implies the loss of independent monetary policy and of seigniorage, yet the significance of such losses can only be evaluated in conjunction with assumptions about the policymaking process. If the government is benevolent and has no credibility problems, dollarization causes a fall in welfare, which can be measured by the implied seigniorage loss or using Mundellian optimal currency area criteria. However, outcomes are rather different if credibility is absent and dollarization can serve as a commitment device: the welfare impact of dollarization is ambiguous, and seigniorage measures and Mundellian criteria may be misleading indicators of the true cost of dollarization. We also evaluate other implications of dollarization, such as those related to last resort lending and financial stability.

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Document Object Identifier (DOI): 10.3386/w8838

Published: Sturzenegger, Federico and Eduardo Levy-Yeyati (eds.) Dollarization. Cambridge, MA: MIT Press, 2002.

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