ABSTRACT

Dollarization has emerged in the last few years as a serious policy issue. Two events contributed to its policy relevance. On the one hand, the string of financial crises in the late 1990s in Asia, Russia, and Brazil – and most recently in Argentina – has triggered a revision of the conventional wisdom about the ways emerging market economies deal with the increased worldwide capital mobility. The central issue is one of policy possibilities: faced with a financial crisis, what can a country do? Devaluation is a possibility, although flexible exchange rate solutions have come under increased scrutiny and criticism, especially when applied to emerging economies (Hausmann, 1999). Some sort of fixed exchange rate system becomes, once again, a policy option.