College of Behavioral & Social Sciences
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Item On Dollarization(1999-04-20) Calvo, Guillermo A.Recent worldwide turmoil in financial markets is triggering a major revision of the conventional wisdom about Emerging Market countries’ (EMs) macroeconomic management. As a result, the debate is wide open as to the set of policies and institutional arrangements that would ensure EMs’ macroeconomic stability. Opinions range from those favoring further pursuing market-friendly reforms to controls on capital mobility and even trade, and from dollarization to floating exchange rates. The debate on the appropriate exchange rate system, in particular, has taken center-stage.Item When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options(1999-06-29) Calvo, Guillermo A.; Reinhart, Carmen M.In this paper we present evidence that capital account reversals have become more severe for emerging markets. Because policy options are limited in the midst of a capital market crisis and because so many countries have already had crises recently, we focus on some of the policies that could reduce the incidence of crises in the first place, or at least make the sudden stop problem less severe. In this regard, we consider the relative merits of capital controls and dollarization. We conclude that, while the evidence suggests that capital controls appear to influence the composition of flows skewing flows away from short maturities, such policies are not likely to be a long-run solution to the recurring problem of sudden capital flow reversals. Yet, because fear of floating, many emerging markets are likely to turn to increased reliance on controls. Dollarization would appear to have the edge as a more marketoriented option to ameliorate, if not eliminate, the sudden stop problem.Item Testimony on Dollarization(2000-06-22) Calvo, Guillermo A.I was invited here to explain about Dollarization, the benefits and costs for the US and the countries that adopt it. Before I start my formal presentation, I would like to state, in no uncertain terms, that I am a firm supporter of such system for many Emerging Market economies, EM, especially if it is done within the context of a Treaty with the US (as in Senator Connie Mack’s proposal). Moreover, I believe global dollarization will have direct economic benefits for the US, and enhance its role as a worldwide leader. Dollarization is the decision to abandon the national currency and replace it by the US Dollar (or some other hard currency like the Euro). This is a major economic and political decision. By default, a dollarized country adopts US monetary policy, even though the two countries could be going through different phases of the business cycle. Moreover, a dollarized country gives up the option of assisting banks by printing money in the case of a systemic bank run. In the first, and more substantive, part of my presentation I will argue that EM have already given up those functions. Therefore, dollarization is a win-win proposition except possibly for some fiscal costs (called seigniorage in the technical jargon). In the second part of the presentation I will evaluate the advantages of regional dollarization, and argue that dollarization is a winning proposition for the US. I will start the discussion by focusing on two key themes: Fear of Floating, and Lender of Last Resort.