The Political Economy of Dollarization: Domestic and International Factors


The future of dollarization will be determined by political economy considerations. Existing scholarship on the political economy of fixed exchange rates indicates factors of potential importance at both the domestic and international levels. At the domestic level the role of stabilizing currencies to encourage trade, and devaluing for competitive purposes, dominates the politics of these decisions. Greater commercial and financial integration with the United States increase the likelihood of dollarization. Internationally-oriented economic agents (financial institutions, borrowers, international firms) are more likely to want dollarization; tradables producers, especially import competers, are more likely to oppose it.

At the international level, dollarization will implicate regional integration agreements. Countries party to such agreements (such as Mercosur) are more likely to dollarize together than separately. Where such agreements are with the United States, or where they increase the level of commercial and financial integration with the United States, they will also tend to increase the likelihood of dollarization. On the other hand, dollarization is likely to put pressure on countries to harmonize financial regulation with the United States, and to require the implicit or explicit approval of American monetary and financial authorities.

Last updated on 03/21/2015