Title: Dollarization Definition
Headings: Dollarization
Dollarization
What Is Dollarization?
Key Takeaways
Understanding Dollarization
An Example of Dollarization

Content: For example, the citizens of a country within an economy that is undergoing rampant inflation may choose to use the U.S. dollar to conduct day-to-day transactions, since inflation will cause their domestic currency to have reduced buying power . Another aspect of dollarization is that the country gives up some of its ability to influence its own economy through monetary policy by adjusting its money supply. The dollarizing country effectively outsources their monetary policy to the U.S. Federal Reserve. This can be a negative factor, to the extent that U.S. period monetary policy is set in the interest of the U.S. economy and not the interests of dollarized countries. However, it can be beneficial if it helps takes advantage of an economy of scale in monetary policy that allows the dollarizing country to economize on resources that would need to be devoted to supplying and managing its own money supply. It may also be the case that domestic authorities have proven themselves incompetent to manage their own monetary policy. Giving up an independent monetary policy can move the dollarizing country closer to an optimal currency area with the dollar. Small countries that engage in a relatively large volume of trade with and have strong economic ties to the U.S. will especially benefit. An Example of Dollarization
Zimbabwe ran a dollarization test to see if the adoption of foreign currency could stave off high inflation and stabilize its economy. Zimbabwe dollar inflation reached estimated annual rate of 250 million percent in July 2008.