Thursday, May 16, 2013

The two meanings of dollarization

This is part of an entry written for the Wiley-Blackwell Encyclopedia of Globalization. From the intro:

The expression of ‘dollarization’ has at least two different meanings. In the narrow sense, it refers to massive currency substitution, in which a country, most likely a developing one, supplements its domestic unit account of fiduciary reserve assets with a foreign currency, more often than not the United States dollar or, in some cases, the euro. Note that currency substitution could be complete and might even imply the elimination of a domestic token. Full dollarization in that sense has taken place in small countries, mostly in Latin America, the Caribbean and the Pacific which are heavily dependent on the United States. Dollarization, in this sense, is the exemplification of a country foregoing its national ‘monetary sovereignty’ (Mundell 1961, p. 661).

In the broader sense, dollarization refers to US hegemony in the world economy as a result of the US dollar being the numeraire currency in international markets. This christens the United States as the premier international monetary authority that regulates and dictates the flows of international financial commitments for global economic activity. Of particular importance in this context is the fact that the key international commodities, including oil, are priced in US dollars in international markets. The former conception of dollarization can be described as dollarization strictu sensu, while the latter as latu sensu dollarization, i.e. not the specific use of the dollar by a country, but by the whole world economy—an international system in which the dollar is de facto a global fiat money (Vernengo, 2006).

Read the rest here.

1 comment:

  1. In the past days, I remenberd when you came to El Salvador (2011) and says us (in spanish): "algunos países se dolarizaron (Ecuador), otros han firmado TLC's (México, Chile, Centroamérica), pero Uds. (El Salvador) lo hicieron todo". Sad words, sad politics and we're trapped in a hegemonic box.-


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