When to Dollarize

Abstract

Implicit in the debate over dollarization are two very different views of the sequencing of policy measures. One view is that dollarization, to work smoothly and yield more benefits than costs, must wait on the completion of complementary reforms. The other view is that dollarization need not wait on these other reforms because the very act of dollarizing will produce the changes needed to smooth the operation of the new regime. In this paper I consider these arguments as they apply to the cases of labor market reform, fiscal reform, and financial sector reform. I conclude that neither theory nor evidence suggests that removing all scope for an independent monetary policy will necessarily accelerate the pace of reform.

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