Dollarization: An Irreversible Decision

Dollarization Traps *

The paper analyzes dollarization in the sense of asset substitution, where a foreign currency competes with local assets, especially domestic capital, as a store of value, the impact of dollarization on capital accumulation and output, and why economies remain dollarized long after a successful inflation stabilization. We relate this dollarization hysteresis to a financial intermediation failur...

Dollarization: Myths and Realities

Dollarization and financial integration

This paper builds a simple theoretical model designed to study dollarization. Each period, a benevolent government decides whether or not to dollarize, how much to borrow or lend on an international bond market, and, if dollarization has not occurred, the devaluation rate. In equilibrium, international borrowing is limited endogenously such that the government always chooses to repay when the p...

Financial Dollarization and Central Bank Crediblity.∗

Why do firms and banks hold foreign currency denominated liabilities? In this paper, we argue that foreign currency debt, by altering the effect of a devaluation on output, has a disciplining effect when the Central Bank’s objectives differ from the social optimum. However, under imperfect information, bad priors about the Central Bank induce excess dollarization of liabilities, which in turn l...

Dollarization and Macroeconomic Stability in Latin America

This paper examines if dollarization has had a positive impact on the macroeconomic stability of Latin American countries. Dollarization refers to either the official or unofficial replacement of local currencies with the U.S. dollar. Currently four Latin American countries are officially dollarized and the rest experience varying levels of unofficial dollarization. Data from the World Bank Wor...