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The Dollarization Debate$
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Dominick Salvatore, James W. Dean, and Thomas D. Willett

Print publication date: 2003

Print ISBN-13: 9780195155358

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0195155351.001.0001

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The Pros and Cons of Full Dollarization

The Pros and Cons of Full Dollarization

3 The Pros and Cons of Full Dollarization
The Dollarization Debate

Andrew Berg

Eduardo R. Borensztein

Oxford University Press

This chapter examines the benefits and costs of full dollarization. It considers emerging market economies in Latin America exposed to volatile capital flows, but not necessarily close, in an economic sense, to the United States. For an extremely dollarized economy, seigniorage revenues would be small, exposures of banks and businesses would make devaluation financially risky, and the exchange rate would not serve as a policy instrument since prices would be “sticky” in dollar terms. In such cases, dollarization offers more benefits and costs.

Keywords:   dollarization, currency risk, seigniorage, monetary policy, Latin America

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