Tuesday, April 05, 2005

Dollarization

In class we discussed the dollarization of the Ecuadorian economy. I found a link to the Senate Banking Committee, which has an article highlighting the benefits of dollarization in emerging market economies, as well as some resulting issues for the Untied States. The article says that Panama is officially dollarized and Argentina and El Salvador have both considered dollarization of their economies. Cuba is dollarized, as well. The purported benefits include lower inflation, faster growth, "deeper" financial markets, budget discipline, and lower interest rates. Some possible problems for the United States would be that dollarized countries may depend on the U.S. for financial bail-out and the United States will be lobbied to consider economic conditions abroad when setting monetary policy. The Senate did not discuss the negative effects that dollarization will have on the Latin American countries. I don't claim to know much about economics, but my feeling is that while dollarization may be beneficial for Latin American countries in the short run, it will have negative and irreversible consequences in the long-run. It seems like it would only be a wise move if the country was in dire straights. The link to the Senate Banking Committee hearing is here.

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