Challenges and Prospects
Edited by Klaus Liebscher, Josef Christl, Peter Mooslechner and Doris Ritzberger-Grünwald
Chapter 7: Lessons from sustained cases official dollarization/euroization
7. Lessons from sustained cases of oﬃcial dollarization/euroization* Adalbert Winkler 1. INTRODUCTION The oﬃcial and unilateral adoption of a foreign currency, commonly known as dollarization or euroization,1 has its place in the world economy’s history, but was out of fashion for a long time – until Kosovo and Montenegro adopted the euro, and Ecuador, El Salvador and East Timor the US dollar as their currency. More important, international ﬁnancial institutions and academic economists re-considered dollarization/euroization as a possible policy option when the crisis of many emerging market economies during the second half of the 1990s underlined the diﬃculties of managing exchange rates in a world of open capital accounts (Calvo, 1999 and 2001).2 However, the costs and beneﬁts of unilaterally adopting another country’s currency have mainly been explored on theoretical grounds (Berg and Borensztein, 2000). Empirical analysis has been largely conﬁned to the case of Panama (Edwards, 2001; Goldfajn and Olivares, 2002). This chapter sheds light on the experience of countries and territories that have oﬃcially and unilaterally used a foreign currency for a long time.3 In particular, it aims at answering the question concerning whether any lessons can be drawn from their experience for countries considering to unilaterally adopt another country’s currency. The chapter is structured as follows. Section 2 discusses the pros and cons of such a move,4 with a special focus on South-East European countries. Based on the criteria stressed by the bipolar view of sustainable exchange rate regimes...
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