This article focuses on dollarization, a situation in which a foreign currency (often the US dollar) replaces a country’s currency in performing one or more of the basic functions of money. The distinction between official dollarization and endogenous dollarization is discussed, as are the concepts of currency substitution and liability dollarization. Implications for monetary and exchange rate policy are emphasized.
KeywordsAggregate demand Capital asset pricing model Currency substitution Dollarization Euro Financial dollarization Inflation Lender of last resort Liability dollarization Monetary policy Net worth effects Portfolio balance Search theory Seigniorage Stabilization Transaction costs
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