Factors to be Considered in Assessing a Country’s Readiness for Dollarization by Nouriel

•= Policy credibility Countries where policy makers have historically suffered from a lack of policy credibility, especially in the monetary area, may benefit from the discipline imposed by a rule-based monetary regime such as a currency board or dollarization. The inability of discretionary policy makers to credibly commit to monetary stability and discipline has been suggested as one of the strongest arguments in favor of the rigid monetary discipline imposed by dollarization. There are sometimes partial exceptions: monetary unions such as EMU resulted more from the desire to create stronger economic and political ties than just the need to provide monetary and inflation stability. But emerging market economies that desire to import the credibility of a low inflation anchor country may consider dollarization as a strong discipline device. The lack of policy credibility can be measured by looking at a number of variables such as: the country’s experience with inflation; a past history of exchange rate instability and crises; the existence of previous financial and banking crises; the degree of unofficial dollarization; the country’s inability to borrow long-term in domestic currency; the country’s fiscal record; the spread between local dollar-denominated and local currency denominated interest rates.