The Pros and Cons of Full Dollarization

Author/Editor:

Eduardo Borensztein ; Andrew Berg

Publication Date:

March 1, 2000

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

We analyze the costs and benefits of full dollarization compared to its closest alternative, a currency board, quantifying for Argentina where possible. Potential advantages include lower borrowing costs and deeper integration into world markets. One cost is the transfer of seigniorage to the United States. The country may also lose the “exit option” to devalue in the face of major shocks. Similarly, even a country with a currency board may lose some ability to act as lender of last resort to the banking system. We review how various country characteristics influence the balance of arguments.

Series:

Working Paper No. 00/50

Subject:

Dollarization Exchange rate regimes Financial crisis Monetary unions

English

Publication Date:

March 1, 2000

ISBN/ISSN:

9781451846966/1018-5941

Stock No:

WPIEA0502000

Format:

Paper

Pages:

32

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