Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency.
The term is not only applied to usage of the United States dollar, but generally to the use of any foreign currency as the national currency.
Official dollarization has gained prominence as several countries have considered and implemented it as official policy.
The major advantage of dollarization is promoting fiscal discipline and thus greater financial stability and lower inflation.
Dollarization can occur unofficially, when private agents prefer the foreign currency over the domestic currency.
They hold for example deposits in the foreign currency because of a bad track record of the local currency; semiofficially (or officially bimonetary systems), where foreign currency is legal tender, but plays a secondary role to domestic currency; or officially, when a country ceases to issue the domestic currency and uses only foreign currency.
It adopts the foreign currency as legal tender.
The term is not only applied to usage of the United States dollar, but generally to the use of any foreign currency as the national currency.
Official dollarization has gained prominence as several countries have considered and implemented it as official policy.
The major advantage of dollarization is promoting fiscal discipline and thus greater financial stability and lower inflation.
Dollarization can occur unofficially, when private agents prefer the foreign currency over the domestic currency.
They hold for example deposits in the foreign currency because of a bad track record of the local currency; semiofficially (or officially bimonetary systems), where foreign currency is legal tender, but plays a secondary role to domestic currency; or officially, when a country ceases to issue the domestic currency and uses only foreign currency.
It adopts the foreign currency as legal tender.