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

Content: Understanding Dollarization
Dollarization usually occurs in developing countries with a weak central monetary authority or an unstable economic environment. It can occur as an official monetary policy or as a de facto market process. Either through official decree or through adoption by market participants, the U.S. dollar comes to be recognized as a generally accepted medium of exchange for use in day-to-day transactions in a country’s economy. Sometimes the dollar assumes official status as legal tender in the country. The main reason for dollarization is to receive the benefits of greater stability in the value of currency over a country's domestic currency. 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.