Table of Contents

Monetary Integration and Dollarization

Monetary Integration and Dollarization

No Panacea

Edited by Matías Vernengo

This book deals with the economic consequences of monetary integration, which has long been dominated by the Optimal Currency Area (OCA) paradigm. In this model, money is perceived as having developed from a private sector cost minimization process to facilitate transactions. Not surprisingly, the book argues, the main advantage of monetary integration in the OCA context is the reduction of transaction costs, yet the validity of OCA to analyze processes of monetary integration seems to be limited at best.

Chapter 13: A Framework for Analysing Dollarization

Paul Davidson

Subjects: economics and finance, financial economics and regulation, international economics


Paul Davidson INTRODUCTION A precise taxonomy is necessary for any analytical discourse. Otherwise the discussion often collapses into semantic obfuscation. In order to understand the implications of a foreign nation adopting the dollar as its internal currency, it is necessary to make clear distinctions between open and closed economies and between unionized monetary systems (UMS) and non-unionized monetary systems (NUMS). Table 13.1 presents the four possible combinations of these features. The closed economy in a UMS in this table is the equivalent of the traditional closed economy model which was utilized with great success by Keynes in The General Theory to demonstrate the possibility of underemployment equilibrium. If, in this rarefied simple case, it was possible to show why market-oriented, Table 13.1 A classification of economic systems by trading patterns and monetary systems Unionized monetary System [UMS] (Q = 0) Non-unionized monetary system [NUMS] (Q > 0 ) Closed economy (f = 0) (1) No external trading partners (2) Single money for contracts (1) No external trading partners (2) Various monies for contracts, no fixed exchange rate 259 Open economy (f > 0) (1) External trading partners (2) Single money for contracts (1) External trading partners (2) Various monies for contracts, no fixed exchange rate 260 Final reflections entrepreneurial economies could yield undesirable levels of unemployment and price instability, then it was reasonable to believe that the more complicated open economies (in the second column of the table) were even less likely to achieve a socially desirable level of output, employment and price stability without...

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