I keep seeing news stories on Argentina dollarizing their economy. Has it worked for other economies? How?
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“Dollarization” is one way for smaller countries to stop a hyperinflation spiral.
Due to economic collapse or poor financial governance (or usually, both) their own currency has been incinerated, losing most of its value and any faith it may have had. People’s savings are gone and international business won’t deal with you in your own currency anymore, rendering it useless.
Rebuilding faith in your domestic currency will take a long time – why trust a government that ruined a currency once to not do it again?
So to quickly get the gears turning again the country can simply scrap their currency and accept a more stable foreign currency for their government and international dealings.
This avoids the mistrust issue because Argentina cannot impact US inflation or interest rates in any meaningful way.
But it also presents a problem – Argentina cannot impact US inflation or interest rates in any meaningful way. Your currency is now beyond your control, and you’re stuck with whatever the current fiscal policy the US wants as your fiscal policy too.
Dollarized economies can’t fuck up their currency anymore, but they can’t manipulate it to encourage growth or deal with downturns either.
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