Adopting Full Dollarization in Postconflict Economies: Would the Gains Compensate for the Losses in Liberia?

 
Author/Editor: Honda, Jiro ; Schumacher, Liliana
 
Publication Date: March 01, 2006
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: 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.
 
Series: Working Paper No. 06/82
Subject(s): Banking systems | Dollarization | Economic growth | Fiscal management | Liberia | Post-conflict emergency assistance

Author's Keyword(s): Dollarization | postconflict economy
 
English
Publication Date: March 01, 2006
ISBN/ISSN: 0 / 1934-7073 Format: Paper
Stock No: WPIEA2006082 Pages: 25
Price:
US$15.00 (Academic Rate:
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