Free UNK Essay Sample
The disparities between dollarization and currency boards are few, but imperative. The key distinguishing feature of dollarization is that it is stable, or almost so. Turning around dollarization is much more complicated than abandoning or modifying a currency board arrangement. Matter facts, the greatest benefits derived from dollarization are as a result of the credibility it carries specifically for the reason that it is almost irreversible. And nevertheless for some nations under certain state of affairs, the irreversibility could come at a very elevated cost.
A government that adopts full dollarization does away with the revenue from the loss of seigniorage but a currency board nation does not. "Seigniorage derived from specie-metal coins, is a tax, added to the total price of a coin (metal content and production costs), that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area...seigniorage derived from notes is more indirect, being the difference between interest earned on securities acquired in exchange for bank notes and the costs of producing and distributing those notes". But a country that adopts full dollarization, by totally eliminating the threat of currency devaluation, achieves lower interest rates on overseas borrowing.
Quantifying the possible savings from lesser interest rates happens to be more complicated than it first comes out, but the cost of seigniorage loss can be approximately estimated. Significant consequences on economic stability and global financial incorporation defy quantification. Giving up any likelihood of depression is costly for various countries, insignificant for others. And all must put into consideration the repercussions of a reduced national role in the provision of lender of last resort conveniences and support for their systems of banking.
Is dollarization, then, the best exchange rate regime, particularly for the developing countries? The answer for each one country is dependent ultimately on its own exceptional characteristics.