The Dollarization Debate

The Dollarization Debate

The Dollarization Debate

The Dollarization Debate

Synopsis

This book takes a global approach, with an emphasis on North and Latin America respectfully, by discussing one of today's most controversial topics in business; Dollarization. With the collapse of the former Soviet Union, and the formation of the Euro in Europe, many countries and debating whether or not a common currency is in their best interest. This intriguing volume brings together the leading participants in the current dollarization debates. Many advocate the notion of acommon currency, while others feel that in doing so will create financial costs for all that take part, with the severity varying from country to country.

Excerpt

Questions of which exchange rate regimes might be appropriate for countries and regions larger than countries have long been central to the concerns of internationally oriented economists, politicians, and policymakers. Although the issue seemed to be settled after 1945, when most free-market countries signed on to the Bretton Woods regime of fixed exchange rates, by 1953 the wisdom of that regime was being challenged in a now-classic essay by Milton Friedman. By 1973 the Bretton Woods regime had collapsed and major countries were using flexible rates more or less by default. But by 1979, the core countries of Western Europe had adopted fixed rates between one another, and in 1999, despite widespread skepticism among economists, they went one step further and adopted a common currency.

Meanwhile, debate and experiment in countries outside Western Europe intensified. By the mid-1980s, a consensus had formed at the International Monetary Fund (IMF) and other Washington institutions that emerging economies were best served by fixed, or at least “managed, ” exchange rates, primarily because this would serve to discipline their central banks and keep inflation at single digit levels. By the mid-1990s, this “Washington Consensus” had been terminally undermined, notably by the Mexican currency crisis of late 1994. A new and radically different consensus began to evolve. The new consensus was that in a post–Bretton Woods world of highly mobile capital, only “automaticity” could avert currency crisis. By this was meant regimes that adjusted automatically to market forces, without government intervention: either fully flexible exchange rate regimes, or fixed-rate regimes that are constitutionally bound by so-called currency boards.

Hence by 1999, after the Asian, Russian, and Brazilian crises of 1997, 1998, and 1999, several eminent economists were advocating fully flexible exchange rates for major emerging economies such as Indonesia, Russia, and Brazil, whereas other, equally eminent economists were recommending fully fixed rates, “guaranteed” by currency boards, for the same emerging economies. Even more dramatically, a growing group of analysts and advisors now propose common currencies, modeled loosely on the European euro, for regions as diverse as Belarus and Russia, and Canada and the United States. Moreover in Latin America and elsewhere, proponents of “dollarization” are advocating outright adoption of the U.S. dollar, with implications for both Latin America and the United Sates that run well beyond even a common currency. In fact several prominent economists have . . .

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