SOME THEORY AND HISTORY OF DOLLARIZATION

The unfamiliar, however simple, is often hard to understand be-cause it requires a slightly different way of thinking. Official dollar-ization is a case in point. It is hard to conceive of a simpler monetary system than using somebody else’s currency. There is no central bank, no independent exchange rate, and more generally no independent monetary policy. Yet precisely because most countries have central banks, people often think about dollarization by using a frame of reference derived from central banking. In this article, I make a few points about the theory and history of dollarization that I hope will provide a better understanding of the system. All “Fixed ” Exchange Rates Are Not Alike About 10 years ago, a consensus began to develop among econo-mists that the extremes of fixed and floating exchange rates were less prone to currency crises than intermediate exchange rates. This so-called bipolar view gained adherents after currency crises in East Asia, Russia, and Brazil in the late 1990s (Fischer 2001). The crises had severe effects on countries that had officially or unofficially linked their currencies to the U.S. dollar, neither letting them float without government intervention nor tying them so tightly to the dollar as to forgo independent monetary policy. Although the bipolar view still has adherents, Argentina’s spectacular economic depression and cur-rency crisis of 2001–02 led many observers to conclude that fixed exchange rates are more prone to crises than floating rates, so floating