Argument: Dollarization and integration encourage stability

Issue Report: Dollarization


  • “Basics of Dollarization”, Joint Economic Committee Staff Report July 1999, Updated January 2000 “Financial integration plus official dollarization using a leading international currency (the dollar, euro, or yen) makes a country part of a large and liquid international pool of funds. Consequently, the location of loans need not be closely linked to the location of deposits. Citibank, for example, does not need to balance its loans and deposits in Panama any more than it needs to balance its loans and deposits in Pennsylvania. It can borrow where the cost of funds is lowest and lend where the risk-adjusted potential for profit is highest anywhere in the dollar zone. The ability of the financial system to switch funds without exchange risk between an officially dollarized country and the issuing country reduces the booms and busts of foreign capital that often arise in countries having independent monetary policies and financial systems not well integrated into the world system. It also helps stabilize the real exchange rate (a measure of the effect of the exchange rate and inflation on the competitiveness of exports [Moreno-Villalaz 1999, pp. 422-4]).Besides helping to stabilize the economy, financial integration improves the quality of the financial system by allowing consumers access to financial institutions that have proved their competence internationally. That forces domestic financial institutions to be high quality to compete with foreign institutions”
  • Daniel Gross. “The Case for Fewer but Stronger Currencies”. New York Times. February 19, 2006 – “And when small monetary boats tie themselves together or link themselves to larger ones, it encourages stability. “European financial markets were able to navigate problems of 9/11 and the Madrid and London bombings without too much instability, because they didn’t have the extra layer of exchange-rate problems,” said Barry Eichengreen, professor of economics and political science at the University of California, Berkeley.”