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Open Access Publications from the University of California

Is A Dollarized Hemisphere in the U.S. Interest?

  • Author(s): Cohen, Benjamin J.
  • et al.

Is dollarization in the U.S. interest? As more Latin American countries contemplate following the examples of Ecuador and El Salvador, which have dollarized unilaterally, it is natural to ask whether the United States can expect to gain or lose in the process. In my opinion, the answer is clear. Considering political as well as economic implications, there is little doubt that risks and prospective costs far outweigh possible benefits. Unless directly challenged by efforts elsewhere to promote international currency use at the dollar’s expense, the United States has no interest in encouraging formal adoption of the greenback by neighboring governments.

The reason is straightforward. Much of Latin America is already extensively dollarized on a de facto basis, as a result of currency substitution – a spontaneous, market-driven process now customarily distinguished as informal or unofficial dollarization. Informal dollarization, it may be argued, realizes significant advantages for the United States. As compared with these gains, little would be added by formal (official) dollarization and much, conceivably, could be lost.

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