Testimony on Dollarization

I was invited here to explain about Dollarization, the benefits and costs for the US and thecountries that adopt it. Before I start my formal presentation, I would like to state, in nouncertain terms, that I am a firm supporter of such system for many Emerging Market economies,EM, especially if it is done within the context of a Treaty with the US (as in Senator ConnieMack’s proposal). Moreover, I believe global dollarization will have direct economic benefits forthe US, and enhance its role as a worldwide leader.Dollarization is the decision to abandon the national currency and replace it by the USDollar (or some other hard currency like the Euro). This is a major economic and politicaldecision. By default, a dollarized country adopts US monetary policy, even though the twocountries could be going through different phases of the business cycle. Moreover, a dollarizedcountry gives up the option of assisting banks by printing money in the case of a systemic bankrun.In the first, and more substantive, part of my presentation I will argue that EM havealready given up those functions. Therefore, dollarization is a win-win proposition exceptpossibly for some fiscal costs (called seigniorage in the technical jargon). In the second part ofthe presentation I will evaluate the advantages of regional dollarization, and argue thatdollarization is a winning proposition for the US.I will start the discussion by focusing on two key themes: Fear of Floating, and Lender of Last Resort.