Dollarization
Julie T. Katzman
In the last eighteen months, the world has seen the near collapse of numerous financial markets and economies as volatility and a crisis atmosphere spread from one corner of the globe to another. This article will address the repercussions of these crises and focus on the attendant volatility on Latin America--the fastest growing export region for the United States and intended partner by 2005 in a new regional trading area.
In evaluating recent economic circumstances, the severity of the 1998 Asian and Russian financial crises has had dramatic repercussions. Once the serious macroeconomic and business practice problems of Russia and Asia were exposed, investors who had lost substantial amounts of money in these markets drew down their balances elsewhere. Currency speculators began to take advantage of weaknesses in other emerging markets, particularly Latin America. Emerging market currencies, such as the Brazilian real, came under attack for being overvalued. Eventually, devaluation and a new exchange rate and monetary policy became necessary to stabilize the Brazilian market. These adjustments have had adverse consequences for real output in Brazil and in the region.
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