Dollarization is the process by which a country abandons its own currency and officially adopts a foreign currency (usually the U.S. dollar) as legal tender for all transactions. In simple terms, residents start using a stable foreign currency instead of the domestic currency for everyday money functions.
With full dollarization, the country no longer has an independent monetary policy. The national central bank, if it continues to exist at all, cannot print money or set interest rates. This is much more rigid than a fixed exchange rate or currency board system. For example, under a currency board, a local currency exists and is pegged to a foreign currency at a fixed rate. Dollarization is seen as a commitment device: it “ties the hands” of policymakers even more firmly than a peg, enhancing credibility that inflation will stay low.
Dollarization at a Glance
Dollarization vs. Other Systems
System | Local Currency? | Monetary Policy? | Commitment Level |
💵Full Dollarization | ❌ No | ❌ None | 🔴🔴🔴 Strongest |
🏦 Currency Board | ✅ Yes (pegged) | ⚠️ Very Limited | 🟡🟡 Strong |
📊 Fixed Exchange Rate | ✅ Yes (fixed rate) | ⚠️ Limited | 🟢 Moderate |
🌊 Floating Currency | ✅ Yes (market rate) | ✅ Full Control | ⚪ Flexible |
Related Pages
- Why Dollarize?
- Steve Hanke's Dollarization Work
- Home: Dollarization — Return to the Dollarization overview