Matthew Calvillo Financial Institutions and Markets Dr. Crowe April 28, 2014 Does Dollarization Benefit Developing Countries? Long has it been taken for granted that all countries must have their own domestic currency with reasons ranging from trading issues to fiscal revenues and other financial variables. When taking a look at the argument for the trading issues it can be said that modification flexibility of the exchange rate allows domestic governing authorities to alter relative prices by depreciating the domestic currency in such a fashion that encourages exports and at the same time discouraging imports. There are several arguments on the financial side, which all relate to central banks money printing abilities and their power to adjust the value of their currency, thus making them to detach the domestic financial markets from the conditions established in the international ones, and to perform as a lender of last resort when a crisis threatens the domestic financial system. Seigniorage, which involves the domestic government being able to tax the domestic currency, is definitely an argument on the fiscal side. If the need for more money in the form of bills and coins arise, the government can produce them as “no interest” coins and bills and are allowed to do with it what they see fit. Most, if not all, of these advantageous characteristics are threatened when a country decides to dollarize. It can be argued that dollarization is a legitimate option for developing nations for a couple for reasons. The first reason being, that the opinions in favor of a local currency are not as strong as they seem when faced with reality. A country’s ability to print money has led to not lower, but higher, interest rates in a majority of... ... middle of paper ... ...such methods have led not only to intervallic spikes of high inflation, disastrous devaluations and financial troubles, but also to enduringly elevated nominal and real interest rates. The possibility of devaluation precludes integration into the global financial markets. The power to devalue has not catapulted exports over the longer term. Actually, it is just the opposite. It has seen to locking developing nations into low valued-added products exposed to wide and unpredictable price shifts. The country of El Salvador calculated the pros and cons of having domestic currency through two consecutive administrations and, ultimately, made the choice to dollarize based on their critical examination. Some countries may discover it practical to conduct their own analysis, and others may find it valuable to embrace the monetary services provided by the dollar global economy.
Mexico’s economy was very unstable and unfair in comparison to the U.S. and Canada’s economic standing. But even though Mexico’s economy was bad, Canada and the U.S. ignored that Mexico wasn’t in any condition to enter as an equal partner (Henderson 121). The overvalued peso in Mexico also caused many problems economically. Since the peso was overvalued for many years, when the peso did float in 1994, it lost 20 percent of its value (Henderson 123). Due to this drastic change to Mexico’s currency, Mexicans were unable to make their payments nor buy goods because the prices rose drastically, which caused many businesses to shut down or lay off their workers (Henderson 123). This was the start of the many problems yet to come because these countries would be trading unequally with Mexico since Mexico didn’t have much to give besides workers who would work for cheap
Just like a public company [that issues too much stock] can be punished by the public markets for diluting its share structure, a nation’s currency can suffer the same effects through inflation if the government prints too much money relative to the value of the economy. This can be co...
Dollarization is the replacement of a country’s domestic currency with that of a foreign currency. Dollarization has occurred in several countries including, but not limited to, Panama, El Salvador, and Ecuador. For countries with volatile currencies, dollarization offers them the ability to stabilize their economy. While dollarization has its pros, it is not without its cons, and for Ecuador, this is no exception. In my initial discussion, I believed that dollarization was a positive move for Ecuador; I still feel this way, and now that I have gained a bit more knowledge concerning the macro economy system, I understand how dollarization aided in Ecuador’s economy to stabilize. However, with all the positives associated with Ecuador’s adoption of the dollar, there are negative aspects as well, and there is no indication of how Ecuador will fair in the long run. In addition, the implications are not limited to the dollarizing country alone; there are pro et contra to the United States and the economies of countries surrounding Ecuador.
The purpose of this is to draw attention to the invisible government which controls the United States. One of the means of control is the Federal Reserve System. Many of us have seen the recent decline of the dollar in the news. We will address this in terms of the Federal Reserve System’s control over the value of the dollar. Much of this is a concentration of quotes by noteworthy individuals such as Economists, Presidents, and Congressmen.
Supported by the domestic intuitional framework, which details that political outcomes are results of a variation in the “rules of the game,” producers are the ones to benefit from a floating exchange rate. Interests are translated into policy via domestic institutions. For example, Congress and farm subsidies. Individuals are interested in their own well-being. Winners gain by lobbying because they prove better than their opponent. In this framework, politicians decide based on majority principles and an increased demand for a country’s products. With more money flow, businesses have incentives to increase domestic prices (Wellhausen 10-2-14). Being so, exchange rate policy is homily political in that it is chosen by a differentiation in the “rules of the game.” Again, everyone sets out to seek their own best interests. Within this same framework, politicians find themselves in a catch-22: although they choose that which is to come, in doing so, they face vast amounts of pressures. Special interest groups and mass public opinions alone carry enough weight to affect any course profoundly and profusely (Frieden, p.
Everyday, millions of transactions take place around the world. However, each transaction effects more than just the two people or companies exchanging goods. As an aggregate, those transactions make up the world economy, the fluctuations of the world economy, and the currency used in the world economy. The United States dollar is one of the most secure and backed currencies in the world, and for that reason, the US economy is often looked to as a model to other nations. There was no exception when the newly formed Israeli government looked to make an economy of its own. The Israeli shekel and the United States dollar have a short, but important, history of interacting with each other. As will be explained, the history of the Israeli shekel plays an important role in understanding the actions taken by the Israeli National Bank. Today, the new Israeli shekel can be analyzed and understood as a complex and growing part of the world economy and a currency that will likely continue to grow and stabilize in the future world economy.
Money is of fundamental importance to the activity of the economy. Money plays an important role in the daily life of a person whether he or she is a consumer, a producer, a businessman, a student, or a politician. An individual need not be an economist to be aware that money plays an important role in economics; an individual need think only of his or her own experience. In a modern economy, money should be used solely as an international medium of exchange. However, with money comes difficulties; and with difficulties such as inequality and financial crises, government regulation is inevitable and preferable. Government regulation of money should expand economic growth, as well as reduce the corruption caused by the growth of money.
The value of the US dollar relevant to other currencies is a major consideration for the Federal Reserve. If they prevent large changes in the value of the dollar, firms and individuals can comfortably plan ahead to purchase or sell goods abroad.
...price and devaluation of the domestic currency to bring it back to A from A’ the country has to sell off its Foreign assets.
The stability of currency values plays a significant role for economic and financial stability. It is not difficult to see the exchange rate fluctuations are widely regarded as damaging. As the movements of the exchange rate have significant and large effects on the trade balance, resource allocation, domestic prices, interest rate, national income and other key economic variables. Then can exchange rate movements be predicted by these fundamental economic variables?
14. William C.Gruben, "Dollarization: The Greenback Goes Global," Federal Reserve Bank of Dallas Expand Your Insight, March 1, 2000 http://www.dallasfed.org/eyi/money/0003.html
Have you ever seen a 100 trillion dollar bill? It may seem impossible, but in the early 2009, Zimbabwe’s government made it possible. The hyperinflation that struck Zimbabwe in 2004 till 2009 produced “starving billionaires.” It was at its peak in 2008 at a rate of 231 million percent. Although the world faced a number of uncontrollable inflation, Zimbabwe is the only country that experienced hyperinflationary episodes in the 21st century. According to the New York Times, the hyperinflation increased in such a frightening manner that “If you need something and have cash, you buy it. If you have cash you spend it today, because tomorrow it’s going to be worth 5 percent less” (Wines). Mostly, inflation is preceded by an increase in the money supply to fulfill the cost of wars, ending empires, or creating new ones. Likewise, Zimbabwe entered the hyperinflation stage when the government policies forced the RBZ (Reserve Bank of Zimbabwe) to print money that helped them to pay of certain debts but in return made the currency worthless. Debates went on and steps were taken to pull Zimbabwe out of this critical situation. Thus, in the late 2008, Zimbabwe’s hyperinflation was controlled after the adoption of U.S. monetary policy.
A government objective generally associated with devaluation is the improvement of a trade deficit. If a country’s imports are greater than their exports, devaluing their currency can help, as it reduces the “purchasing power of domestic money in terms of foreign goods and increases the purchasing power of foreign money in terms of domestic goods” (Johnson, 1971). This in effect means domestic goods (exports) become cheaper and imports become more expensive, resulting in an increase in the demand for exports, with a fall in imports, and hence improving the balance of payments. Being South America’s largest oil-producing nation, Venezuela receives most of its export income from this industry. It therefore comes as no surprise that devaluation is so attractive to their policy makers as increased demand for their oil exports would allow them to accumulate more domestic monetary resources. However, an implication of this policy has been the negative effect on the poor who spend the majority of their income on food and other basic necessities that are mainly imported goods. With inflation averaging between 20-30%, this has meant that fewer goods are...
This book highlights certain economic/financial methods used by various governments in an attempt to boost their own economy and place them at the top of the proverbial food chain. Unfortunately, competitive devaluation is a main weapon in the arsenal of financial tactics to achieve that very goal. Rickards tells us how badly major currency wars in the past have always ended – we should not engage in them.
Daily in the USA about 38 million banknotes of various face value for total amount about 541 million dollars are issued (Facts about USA money).Dollars involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off of competitors of the USA in foreign markets. At the same time import to the USA owing to effect of a rise in prices restrains. Thus, for the USA changes in the exchange rate of dollar anyway bring benefits and advantages.Reduction of leading positions of the USA in world economy is assisted by the international role of dollar which remains the main reserve and settlement means in world monetary system. Foreign currency reserves of the central banks of other countries for 61% consist of dollars, nearly 2/3 calculations in world trade are carried out in dollars; the dollar serves as a measure of value of many important goods (for example: oil) in the world market; in dollars 3/4 international bank crediting is made (Aleksandr Popov). Changes in the exchange rate of dollar involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off...