Adopting Full Dollarization in Postconflict Economies: Would the Gains Compensate for the Losses in Liberia?
IMF Working Papers, March 1, 2006
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Bibliographic details
- Authors: Liliana B Schumacher, Jiro Honda
- Published: March 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451863420.001
Summary and conclusion
- 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.
- Conclusion: 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.
Major findings and analysis
- Empirical evidence does not support claims that full dollarization yields enhanced fiscal discipline.
- Empirical evidence does not support claims that full dollarization produces faster economic growth.
- Full dollarization would raise vulnerability to external shocks and exacerbate social fragility in Liberia.
- Banking sector implications: fully dollarized regimes impose additional capitalization requirements that Liberian banks cannot meet at present.
- Fiscal/resource cost: loss of seigniorage would be a costly real-resource implication of dollarization.
Subject and keywords
- Subject: Banking, Currencies, Dollarization, Exchange rate arrangements, Government asset and liability management
- Keywords: deutsche mark, dollarization debate, dollarization regime, exchange rate, foreign exchange, full dollarization, WP
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