Argument: Dollarization limits monetary policy flexibility

Issue Report: Dollarization


  • Daniel Gross. “The Case for Fewer but Stronger Currencies”. New York Times. February 19, 2006 – “But one economist’s reassuring stability can be another’s troubling rigidity. If the price of coffee plummets or the price for textiles falls because of competition from China, a Latin American country that has dollarized won’t have the option of cutting interest rates to stimulate growth. ‘Dollarization takes away the option of depreciation,’ Professor Hausman said.”
  • “Basics of Dollarization”. Joint Economic Committee Staff Report July 1999. Updated January 2000 – “It has also been claimed that there is a cost of losing flexibility in monetary policy, such as when the issuing country is tightening monetary policy during a boom while an officially dollarized country really needs looser monetary policy because it is in a recession. In a dollarized monetary system the national government cannot devalue the currency or finance budget deficits by creating inflation, because it does not issue the currency.”