Dollarization and Free Choice in Currency

Abstract

I describe and defend the dollarization of Ecuador in 1999-2000 as a bottom-up phenomenon, an expression of consumer sovereignty by money-users, to which the government finally conceded. From that perspective I rebut common top-down (social planner) arguments against dollarization, and criticize the Ecuadorian government’s current plans to introduce a government-issued cellphone currency. I suggest legalizing private issue of paper and electronic dollar-denominated currencies as a way to neutralize the seigniorage and national-pride objections to dollarization.

Note: This is a written version of my keynote address to conferences on "Quince Años de la Dolarización: Análisis y Perspectivas" [Fifteen Years of Dollarization: Analysis and Perspectives] held in Quito, Ecuador, 12 November 2014, and Guayaquil, Ecuador, 13 November 2014.

Keywords: Dollarization, Ecuador, consumer sovereignty, seigniorage, optimum currency area

JEL Classification: E58, E65, F33