Adopting Full Dollarization in Postconflict Economies: Would the Gains Compensate for the Losses in Liberia?

March 1, 2006

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Format: Chicago

Liliana B Schumacher, and Jiro Honda. Adopting Full Dollarization in Postconflict Economies: Would the Gains Compensate for the Losses in Liberia?, (USA: International Monetary Fund, 2006) accessed November 21, 2024

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

This paper discusses whether adopting the U.S. dollar as the sole legal tender could help Liberia, a postconflict economy, to boost growth and strengthen fiscal discipline. In view of the performance of exchange rate regimes in many countries and Liberia's own experience with dollarization, we conclude that Liberia should not adopt full dollarization for the following reasons: (i) the alleged benefits voiced by the proponents of dollarization, in terms of enhanced fiscal discipline and faster economic growth, are not supported by the empirical evidence; (ii) dollarization would increase the Liberian economy's vulnerability to external shocks and Liberia's social fragility; (iii) banks in fully dollarized economies face additional capitalization requirements that Liberian banks cannot meet at present; and (iv) dollarization would be costly in terms of real resources because of the loss of seigniorage.

Subject: Banking, Currencies, Dollarization, Exchange rate arrangements, Government asset and liability management

Keywords: Deutsche mark, Dollarization debate, Dollarization regime, Exchange rate, Foreign exchange, Full dollarization, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/082
Stock No:

WPIEA2006082
ISBN:

9781451863420
ISSN:

1018-5941

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