Dollarization
In the aftermath of global economic crises in Asia and Russia to threats of default by Latin American nations, there is a pursuit for better monetary arrangements that are more crisis proof. At the root of many of these problems has been policy; resulting in problems such as hyperinflation. Gradually monetary policy worldwide has progressed from fixed rates to flexible rates with the intention of developing a strategy focused on inflation targeting. Recently, however, there has even been debate over the alternative of abolishing exchange rates all together. This paper begins with an introduction of dollarization, forms in which it exists and reviews some general benefits and costs to the nations adopting this policy. In the second half, I address the growing trends of dollarization in Latin America, which have shown positive results in short term, but conclude with an evaluation of possible long term effects on Latin American and the United States.The ascent of dollarization from being a relatively neglected issue to the role of powerful economic remedy is mysterious and intriguing. Dollarization is the process in which a country adopts, in whole or in part, the U.S. dollar as its official currency. Currently Panama is t
While rather small, from an economic point of view, there is also a monetary cost associated with dollarization. Seigniorage revenues (essentially the difference between the cost of producing and distributing paper and coins), although estimated to be less than one percent of gross domestic product in most countries are lost by the country that dollarized unless the United States decided to share part of the extra seigniorage it would obtain. In addition, a dollarizing country would be relinquishing any possibility of having an autonomous monetary and exchange rate policy, including the use of a central bank credit to provide liquidity support to the banking system. Another reason for intentional dollarization is to limit the possibility of high inflation. A country that has totally dollarized has eliminated the monetary policymaking role of its central bank. Without a national currency to manage, the country's monetary policy is, in effect, put into the hands of the United States Federal Reserve. As long as the U.S. monetary policy is prudently managed, the inflation environment in the dollarized economy should remain subdued. The 21st century, marked by the drastic lowering of barriers to foreign trade and financial transactions, coupled with the volatility of international capital markets, seems to be propelling the world towards the elimination of monetary divisions and closed economies. A number of regional experts and business leaders argue that Latin America should abandon its diversity of local monies and adopt the United States dollar as its common currency . They consider that such formal dollarization is not only unavoidable for Latin America given the increasing globalization of production and finance, but also a necessary step to promote the region's dynamic insertion into the world economy. In their view, this monetary reform, by eliminating all uncertainty regarding nominal exchange rate variations, would produce enormous benefits for the region: greater price stability, reduced transaction costs in foreign trade, lower inflation and interest rates and thus healthier banking systems and higher levels of economic activity. However, notwithstanding its potential benefits, the surrendering of monetary sovereignty entails important costs and risks that should not be overlooked.
Some common words found in the essay are:
Latin American, Latin America, Latin America's, Reserve United, Federal Reserve, Russia Brazil, America United, Monetary Union, Currently Panama, Secretary Treasury, latin america, latin american, monetary policy, latin america's, federal reserve, exchange rate, adopting policy, monetary union, common currency, economic activity, nominal exchange rate, continental monetary union, crises asia russia, exchange rate variations, america's economic development,
Approximate Word count = 2353
Approximate Pages = 9 (250 words per page double spaced)
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