Dollarization
Candlefocus EditorThe benefits of dollarization include increased financial stability and the ability to obtain sound monetary and regulatory policies of the U.S. government. By having a strong external currency, such as the U.S. dollar, countries protect themselves from currency devaluation, inflation, or other unforeseeable changes in the foreign exchange market. Similarly, by using the U.S. dollar as its main currency, a nation is ensured to have access to the American financial infrastructure, as well as the U.S. Federal Reserve.
Although there are numerous benefits, dollarization can also bring about some drawbacks. One of the main disadvantages is that, by relying on a foreign currency, a nation loses its freedom of action in its economic and monetary policies. Such includes the ability of the government to manage its external debt, develop its own financing strategies, and to adjust its interest rates. Moreover, by emphasizing the external currency, it can discourage local citizens from conducting local business, which will then result in reduced local economic activity.
Overall, dollarization is a complex phenomenon which can result in both positive and negative impacts on the economy of a country. For example, a few nations in Central and South America have successfully used it to increase financial stability and stimulate economic growth. Dollarization of a nations currency is a sound way to bring the circulation of currency in a deadlock, stimulate economies in flux, and enhance overall financial stability. Countries that opt for it must do so with a thorough evaluation of their economic state and make sure it brings more benefits than costs.