DOLLARIZATION IN DEVELOPING COUNTRIES: RATIONAL REMEDY OR DOMESTIC DILEMMA?

This paper reviews the policy implications of dollarization in developing economies. It outlines channels of U.S. currency access abroad and illustrates progressing stages of dollarization for various country examples. It analyzes the costs of large seigniorage losses facing domestic governments vis-a-vis the U.S. issuer. Finally, it provides three explanations for the observed inertia in dedollarization following domestic stabilization policies: (i) high transactions costs of switching monies, (ii) dollar revenues related to illegal commercial activities, and (iii) network externalities associated with foreign currency usage. Copyright 1996 Western Economic Association International.