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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.
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Chapter 14: Dollarization in Latin America: 2004 and Beyond

Kenneth P. Jameson


Kenneth P. Jameson Introduction At the time of the conference in May 2001, it seemed possible that the entire Western Hemisphere would soon move toward adopting the dollar as the uniform currency. Ex-President Menem of Argentina was positioning himself for another run with full dollarization one of his major proposals. Theoretical articles (Courchene and Harris, 2000) supporting Canadian monetary union with the USA and abandoning its own ‘loony’ had been joined by favourable statements from politicians and from important public intellectuals (Grubel, 1999). El Salvador had switched from a fixed exchange rate to a dollarization process, and Guatemala had begun to allow transactions in dollars and expected the dollar to displace the quetzal. Stanley Fischer (2001), from his powerful position as the First Deputy Managing Director of the IMF, espoused the ‘bi-polar’ view: countries should either float or adopt a hard peg such as dollarization. Many predicted that the entire western hemisphere would soon be dollarized (Schuldt, 2001; Trejos, 1999; Tuculet, 2001). Now, several years into the millennium, a western hemisphere monetary union no longer seems likely; the dollarization momentum has diminished. After providing an update on the status of dollarization in 2004, this chapter examines the reasons for the reversal of dollarization’s fortunes, with an eye to future exchange rate regime developments in Latin America. The conclusion is that official dollarization remains on the policy table, if for no other reason than continued unofficial dollarization. However, the prevalence of official dollarization will expand only if a number of the...

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