GLIM WORKING PAPER SERIES
WANT DOLLARIZATION ?
NO! NO!
Sundara B Reddy
GREAT LAKES INSTITUTE OF MANAGEMENT
South Mada Street, Srinagar Colony,
Saidapet, Chennai
July 2004
We are indebted to Lakshmi Kumar, Bala V Balachandran, Gulshan, Shishir, Praveen for useful comments and suggestions. Of course, we are solely responsible for any shortcomings. The views expressed herein are those of the authors and not necessarily those of the Great Lakes Institute of Management.
© 2004 by Sundara B Reddy. All rights reserved. Short sections of text, not to exceed
two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
Want Dollarization? No! No!
Sundara B Reddy
GLIM Working Paper
July 2004
JEL No. E42, F41, F42
ABSTRACT
This paper discusses major analytical aspects of dollarization and their practical implications. We develop a simple model to stress that dollarization implies the loss of independent monetary policy, yet the significance of such losses can only be evaluated in conjunction with assumptions about the policymaking process. If the government is benevolent and has no credibility problems, dollarization causes a fall in welfare, which can be measured. However, outcomes are rather different if credibility is absent and dollarization can serve as a commitment device: the welfare impact of dollarization is ambiguous. We also evaluate other implications of dollarization, such as those related to last resort lending and financial stability.
Sundara B Reddy
1 Introduction
In the dollarization debate, some have indeed argued that dolla ...