Dollarization Case
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With the advent of globalization, dollarization has been one of the byproducts in which is today still questionable as to the effects on the nations involved. Dollarization, as we know it, is the adoption of one countrys currency by another country. In this paper, titled Dollarization: Whats in it for the US? by David E. Altig -the author explored the application of dollarization cause and effects on the countries involved. Our group will try to simplify the concept of Dollarization, Seigniorage and the future livelihood of monetary governance, as well as, similar concepts that comes along with currency adoption.
Dollarization in its more polished approached is known as Currency regionalization. Two well-known groups have implemented this; the European Union States and also in the Organization of Eastern Caribbean States (Islands) (OECS), these groups used the EU and the EC commonly known respectively. Although, most will see Currency Regionalization more of a win-win situation to the economies involved, which is true since transformation to the one currency involves subscribing to a unique laws and policy that governs the region. It is also noted that the European Union prefers if countries do not adopt the euro-dollar if they have not subscribe to the Maasstrict Treaty and like the EU the OECS also have treaties that govern the members. Dollarization on the other hand can be adopted by any country without any restrictions.
Dollarization depending on the approach, in which countries take to implement this, can also yield two different obvious to the countries involved. Having a deeper financial system for an inflationary economy, it harbor advantages and disadvantage for both issuing and adopting countries. As an issuing country, such as the United States (US) usually have two major decisions in a dollarization relationship. These Decisions are the polar opposite of each other, one is passive acceptance and the other is active resistance. Active resistance provides a choice to the issuing country; this choice however might create a kind of obstacles for the international money circulation depending on the state of the adopting country economy. Todays interconnected world is most likely to pursuit passive acceptance strategy. Both active resistance and passive acceptance strategies has pros and cons from the vantage of the issuing country. Seigniorage is on of the pros by the issuing country.
Seigniorage is a type of tax that is levied by the issuing country for the privilege of using its currency. The issue is more related to the amount that is considered to create a win-win situation for both issuing and adopting countries rather than the payment of the use. American as an issuing country gains seigniorage income that ranges between 0.2-0.8 of GDP; this is gain only from printing money. It means while there is a little cost in printing money, seigniorage is still raises income for the US.
Another main advantage of dollarization