What does full dollarization mean?

Full dollarization means taking the next step, from informal, limited dollarization to full, official use of the foreign currency in all transactions. The main attraction of full dollarization is the elimination of the risk of a sudden, sharp devaluation of the country’s exchange rate.

How do you calculate dollarization?

A “real” deposit dollarization index is computed by converting both foreign currency deposits and bank deposits to dollars and multiplying both (back to domestic currency) by a fixed base-year nominal exchange rate.

What is meant by debt dollarization?

Dollarization is the term for when the U.S. dollar is used in addition to or instead of the domestic currency of another country. Dollarization usually happens when a country’s own currency loses its usefulness as a medium of exchange, due to hyperinflation or instability.

Is dollarization permanent?

Full dollarization, however, is an almost permanent resolution: the country’s economic climate becomes more credible as the possibility of speculative attacks on the local currency and capital market virtually disappears.

What is meant by currency board?

A currency board is an extreme form of a pegged exchange rate. Often, this monetary authority has direct instructions to back all units of domestic currency in circulation with foreign currency. Currency boards offer stable exchange rates, which promote trade and investment.

What are the disadvantages of dollarization?

Disadvantages include the loss of monetary autonomy, seigniorage, and a vital national symbol as well as greater vulnerability to foreign influence. For the United States, conversely, advantages include gains of seigniorage, prestige, and political authority.

Which of the following is a benefit of dollarization?

One of the expected benefits of full dollarization in the short run is the decline of inflation rates and inflation expectations. Full dollarization eliminates the risk of depreciation of the domestic currency, a contributing factor to the acceleration of inflation.