Integration in the Global Economy
New Horizons in Money and Finance series
Edited by Suthiphand Chirathivat, Emil-Maria Claassen and Jürgen Schroeder
Chapter 5: The dollarization debate: is it over?
Ricardo Hausmann 5.1 INTRODUCTION Once upon a time, there was a debate about a bi-polar option in the choice of exchange regimes. The point was that intermediate exchange rate regimes were likely to be blown away by currency speculators.1 Countries would either have to allow their currencies to float freely – and move to the flexible pole – or they would have to peg very rigidly their exchange rate through currency boards or full ‘dollarization’ or ‘euroization’.2 Today, Argentina’s crisis seems to have eliminated one of the poles from the world of intellectual respectability. It seems that the shortcoming of hard pegs in complex economies should be strongly discouraged. Nevertheless, the issue is of obvious importance in Europe, especially for the accession countries to the East. Moreover, countries such as Ecuador and El Salvador have recently dollarized, and others in CentralAmerica are giving the option serious consideration. To be fair to conventional wisdom, the bi-polar view never really existed. It was really a view about the convenience of floating regimes for emerging markets, but with an escape clause to make room for Hong Kong and Argentina. That was the thrust of the G-7 declaration in Cologne in 1999, where those leading countries pledged not to provide financing to strengthen the ability of countries to defend ‘unsustainable’ exchange rates.3 This preference for floating regimes stems from two radically different views: one based on virtue and the other on vice. The virtuous critique would argue that dollarization or currency boards have such a long...
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