Addressing the Symptoms and Ignoring the Causes: A View from Wall Street on Dollarization
10 Pages Posted: 10 Apr 2000
Date Written: March 1, 2000
Dollarization removes access to monetary and exchange rate policies. Proponents hope that these constraints will force governments to adopt institutional reforms. However, it is interesting to note that the countries that seriously consider dollarization are only those under extreme economic stress. We argue that politicians who pursue dollarization appear to be more interested in political survival rather than forcing their countries into a draconian adjustment needed to sustain the policy. The real motive behind dollarization is to create an illusion of monetary and exchange rate stability by fixing nominal variables. However, households and investors will lose confidence as soon as they realize that the government will not implement the real reforms needed to sustain the policies.
JEL Classification: E0
Suggested Citation: Suggested Citation