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Adopting Full Dollarization in Postconflict Economies: Would the Gains Compensate for the Losses in Liberia?
Author:
Miss Liliana B Schumacher
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and
Mr. Jiro Honda
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Series:
IMF Working Papers
Volume/Issue:
Volume 2006: Issue 082
Language:
English
Publication Date:
01 Mar 2006
DOI:
https://doi.org/10.5089/9781451863420.001
ISBN:
9781451863420
ISSN:
1018-5941
Pages:
25
Keywords:
WP; exchange rate; foreign exchange; full dollarization; dollarization debate; deutsche mark; dollarization regime
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper discusses whether adopting the U.S. dollar as the sole legal tender could help Liberia, a postconflict economy, to boost growth and strengthen fiscal discipline. In view of the performance of exchange rate regimes in many countries and Liberia's own experience with dollarization, we conclude that Liberia should not adopt full dollarization for the following reasons: (i) the alleged benefits voiced by the proponents of dollarization, in terms of enhanced fiscal discipline and faster economic growth, are not supported by the empirical evidence; (ii) dollarization would increase the Liberian economy's vulnerability to external shocks and Liberia's social fragility; (iii) banks in fully dollarized economies face additional capitalization requirements that Liberian banks cannot meet at present; and (iv) dollarization would be costly in terms of real resources because of the loss of seigniorage.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2006: Issue 082