Testimony on Dollarization
Testimony on Dollarization
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Date
2000-06-22
Authors
Calvo, Guillermo A.
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Abstract
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.
Notes
Presented Before the Subcommittee on Domestic and Monetary Policy
Committee on Banking and Financial Services
Washington, DC, June 22, 2000.