Dear Emmanuel,

The main problem for stability seems to be that a country that dollarize will give up domestic monetary policy. It will be at the mercy of the country whose currency it adopts. It did not help Argentina with its financial crises in 2000s, for when the dollar appreciated in the late 1990s, it experienced overvaluation, which let to capital flight in 2001, mounting budget deficit, and the abandonment of the peg to the dollar.

 In July 21, 2005 China abandoned the peg and adopted a managed float. It managed to under value the yuan perhaps by 40 percent, which boosted its exports. Facing international pressure, it had made some insignificant gestures in appreciating the yuan but never sufficiently.

 However, dollarization seems to have been good for growing economies. Growth requires a strong stable currency to attract capital.  This however, is also subject to the risk of appreciation of the pegged currency. The good about it is it avoids the monetization of debt, but that requires fiscal discipline.

DOLLARIZATION: Countries that adopted dollarization include: (i) Ecuado, (ii) El Savador, (iii) Panama; and (iv) Liberia. The effects of dollarization include:

1. Eliminate foreign currency risk

2. Eliminate the risk of currency mismatch

3. Prevent speculative attacks from outside

4. Less information is need by investors

REFERENCES: See attached articles. Cheers.

Dear Paul & Lall,

I am very appreciative of your contributions; very useful and well done. Thank you and thank you so much.

Dr. Abolo

I did an empirical investigation on the affect of dollarization on the exchange rate stability. It may answer your question. Cheers.

http://www.savap.org.pk/journals/ARInt./Vol.2(3)/2012(2.3-72).pdf