Dollarization is the use of the U.S. dollar as the official currency of the country. List and explain the arguments for and against dollarization. Provide example/s of countries that used the dollar as its official currency

Question

What will be an ideal response?

Answer 1

Answer: The arguments for dollarization are: 1) country that dollarizes removes any currency volatility (against the dollar) and would theoretically eliminate the possibility of future currency crises, 2) expectations of greater economic integration with other dollar-based markets, both product and financial. This last point has led many to argue in favor of regional dollarization. Three major arguments exist against dollarization. The first is the loss of sovereignty over monetary policy. This is, however, the point of dollarization. Second, the country loses the power of seigniorage, the ability to profit from its ability to print its own money. Third, the central bank of the country, because it no longer has the ability to create money within its economic and financial system, can no longer serve the role of lender of last resort. This role carries with it the ability to provide liquidity to save financial institutions that may be on the brink of failure during times of financial crisis.