The Dollarization of Latin America: Beneficial or Detrimental to Economic Growth Iris Ceballos Wei-Han Chang Ryan Higashihara Keren Nahum Adriana Montes Michael Pham

What is Dollarization? Official: Foreign country adopts the dollar as their national currency –Eliminates old currency in favor of the dollar Unofficial: Foreigners hold bank deposits in dollars to avoid high rates of inflation.

Advantages Avoids currency and balance of payments crises Strengthens financial institutions, lowering possibility of inflation –Creates positive sentiment toward investment Closer integration with global and U.S. economies –Lower transaction costs and assured stability of prices

Disadvantages Loss of control over monetary policy Loss of profits from seignorage Loss of national identity Loss of lender last resort

Arguments for: Ecuador’s positive reaction: –Drop in inflation rates 60% to 23% in % in January of 2002 Expectations of single digit rates by 2003

Arguments for: Ecuador cont. –GDP growth of 5.4% in 2001: highest in Latin America –Increase in purchasing power –Increased stability and confidence in financial institutions Standard and Poor’s upgrading of bonds from negative to stable

Arguments Against: Ecuador Lack of history Dependency on the United States Rich gets richer and the poor are SOL Not a quick solution for their long-term economic problems

Arguments Against: Argentina would have been in a worse stage if they went to full dollarization Panama: stop of cash flow

Conclusion: Pro LOWER inflation LOWER transaction costs Higher CONFIDENCE for investors INCREASED purchasing power DISCIPLINE for irresponsible countries

Conclusion: Con