DEFINING DOLLARIZATION
The IMF defines this term as the use by residents of one country of assets denominated in another country's currency.
What is Dollarization?
Dollarized nations have a 1:1 ratio for this, which provides absolute price stability.
What is a fixed exchange rate?
In a dollarized nation, the domestic money supply is determined by the net balance of transactions with the rest of the world, acting as this device.
What is the "money pump"?
Because a dollarized nation has no monetary policy, this becomes the primary tool for the government.
What is Fiscal Policy?
This South American country fully dollarized in 2000 to stop a massive hyperinflation rate of 96.2%.
What is Ecuador?
This is an extreme measure that happens when a country completely eliminates its domestic currency and adopts a foreign one to crush hyperinflation.
What is Full Dollarization?
Under the Trilemma, because dollarized nations choose a fixed exchange rate and free capital flow, they must abandon this.
What is independent monetary policy?
This occurs in the Balance of Payments when a country's exports are greater than its imports.
What is a surplus?
Dollarized nations lose out on this specific term, which represents the profit a country makes from printing its own money.
What is Seigniorage?
By dollarizing in 2001, this country used the "Credibility of the Dollar" to boost its investment from 1.6% to nearly 26% of its economy.
What is El Salvador?
In this system, citizens widely use a foreign currency alongside their domestic currency as a safety net after losing trust in their own money.
What is Partial Dollarization?
Unrestricted free capital flow allows investors to move money in and out, which is vital for attracting this:
What is Foreign Direct Investment?
During this type of cycle triggered by an external shock (like an oil price spike), trade deficits grow and dollars flow out of the country.
What is the Contractionary Cycle?
To survive external shocks, governments must maintain high fiscal reserves of these non-dollar assets.
What is gold?
This nation achieved extremely low inflation, averaging just 0.5% in 2018, by strictly adhering to dollarization.
What is Panama?
Full dollarization permanently takes away the local government's of the ability to do this unsustainably.
What is print money?
This is the name of the economic model that dictates a country can only choose two out of three macroeconomic policy options.
What is the Mundell-Fleming Trilemma?
During a trade deficit, cash becomes more scarce, which automatically causes these to rise.
What are interest rates?
Because a dollarized country cannot just print money, it has to "import" it by providing fiscal incentives to attract this.
What is Foreign Direct Investment (FDI)?
Panama does not require a central bank for growth mainly because this specific sector accounts for a 77% of its GDP.
What is the services sector?
Unlike full dollarization, in a partial dollarization system, the government still maintains this.
What is an official currency?
Keeping a fixed exchange rate gives a dollarized country credibility in these areas.
What are global markets?
Without a central bank to do this to flows, trade deficits cause fast money issues.
What is "sterilize"?
Without a lender of last resort, having low fiscal discipline and large deficits can quickly lead to this state.
Hint: Defined as the inability to pay one's debts.
What is insolvency?
After dollarizing, Ecuador gained the structural stability needed to survive volatility in the global price of this commodity.
What is oil?