I am pleased to have this opportunity to reflect alongside Chairman Greenspan on the issues
raised by recent discussions in a number of Latin American countries about the possible
dollarization of their economies.
The recent traumatic events in emerging market economies have provoked a reassessment of the
international financial system, here in the United States and across the international community.
A great deal has been learned -- and a number of important reforms have been or are in the
process of being put in place. But clearly, important and difficult questions remain.
As Secretary Rubin noted yesterday, one especially important issue arising out of these crises
indeed, many crises in recent years is the difficulty of successfully maintaining fixed, or semi-fixed exchange rate regimes. Where these were present and proved impossible to defend in
Thailand, Russia, Brazil and other countries, this has clearly created difficulties not merely for
the countries concerned but for the international community as a whole.
These experiences, coupled with the advent of European economic and monetary union, have
sparked renewed discussion of a possible reduction in the number of the world's currencies. In
particular, in Latin America, the issue of dollarization has been raised in a number of countries.
To make another country's currency one's own is a momentous decision for any country and will
need to be considered with a very careful eye to the potential costs and benefits. But before
turning to these issues, we should remember that sound fundamentals are needed to underpin any
credible choice. A sustainable fiscal position, well-functioning labor and capital markets, and an
environment in which private property is respected and contracts are enforced with these things
in place it is probably possible to make a success of a number of different exchange rate regimes.
Where one or all of these things are lacking, it is probably impossible to make a success of any.
With this basic proviso in mind, let me now turn to some of most important considerations that
would need to enter a country's decision to dollarize; and some of the considerations that might
arise for the United States.
Considerations For Economies Considering Dollarization
Two sets of issues can usefully be distinguished in this area: first, the decision to maintain a fixed
exchange rate system rather than a floating one; and second, the decision to create a stronger
sense of irrevocability around that fixed rate system, as, for example, in the decision to dollarize.
Even economists who agree on most aspects of economic theory and practice will often be
divided on the relative merits of fixed versus floating exchange rates. For some, such as Milton
Friedman, exchange rates are a price: a price that should be flexible for the same reasons that
others are. For others, it is a promise, one that should be firm and that should not be broken or
The right choice between these two options poses enormous questions and does not yield any
On the one hand, a fixed nominal exchange rate provides stability to exporters and importers and
can help to anchor domestic inflation expectations. These benefits will be especially attractive to
countries with a record of financial instability and domestic monetary policy-making that has
failed to keep inflation in check.
On the other hand, maintaining a permanently fixed exchange rate regime means accepting the
loss of domestic monetary independence that goes with it. The domestic monetary authorities are
ceding the capacity to use monetary or exchange rate policy to cushion the economy against
external shocks. This, in turn could mean greater volatility in output and employment where
domestic prices and wages cannot adjust rapidly in response to such shocks.
Where a country has already made a strong commitment to a permanently fixed exchange rate, it
is clear that the trade-off is somewhat different. Notably: the traditional margins of adjustment
working through the exchange rate or domestic monetary policy, theoretically, at least, are no
This has been said to make the case for dollarization, in such circumstances, somewhat stronger.
But even here countries will need to consider the benefits against the potential costs:
In this context, it is worth noting that President Menem of Argentina has discussed the possibility
of fully dollarizing the Argentine economy, and Argentine financial officials have had informal
discussions of issues relating to dollarization with Treasury and Federal Reserve officials. Those
who favor this step in Argentina believe, among other things, that under their currency board
system, they have already borne most of the costs of dollarization, but they are not yet enjoying
dollarization's full benefits. For example, interest rates on Argentine peso-denominated deposits
have been nearly 1½ percentage points higher on average over past two years than on their
dollar-denominated equivalents, and the spread has widened to more than 4 percentage points on
occasion. In their view, dollarization, in addition to the other potential benefits, would result in
substantially lower and less volatile interest rates.
Once again, for Argentina as for any other nation, the decision to adopt another country's
currency is an enormously consequential one that would need to be considered in a careful and
extended manner. Countries can obviously choose to adopt the dollar as legal tender without our
assent. However, such a decision has some consequences for the United States, and we hope and
expect that countries would consult with us in advance.
Let me turn now to the potential implications of broader dollarization for the United States,
which I know to be of great interest to members of this Committee and others in Congress.
Possible Considerations for the United States
Speaking as an analyst, the question of the impact of dollarization by other economies on the
United States economy raises a number of considerations.
If a country or countries decide to adopt the dollar, the United States can expect to benefit in
a number of ways:
The desire to deepen economic integration was an important motivating factor behind the single
currency project in Europe. The currently modest extent of trade between the United States and
individual Latin American countries other than Mexico would limit the short-term
implications for the United States unless dollarization were to become a regional trend.
Excluding Mexico, Latin America accounts for 7 percent of United States trade more than any
single country except Canada, Japan, and Mexico. But no single Latin American country
accounts for more than 2 percent of the United States total.
That said, by and large these are economies whose tradable sectors with governments opening
up after years of protection -- are growing much faster than the economy as a whole. United
States exporters have also generally enjoyed a much higher share of Latin American markets that
they have in those of most other emerging market economies. To the extent that dollarization
helped to consolidate or expand our large role in Latin American markets, it might help to ensure
that we continued to benefit disproportionately from their future growth.
As I noted earlier, experience with discretionary monetary policy in a number of countries in
Latin America has been that its potential benefits have not been fully realized. If dollarization
helped to achieve greater economic stability and growth in countries in our hemisphere which
have suffered so much instability in the past, it would clearly be in the economic and broader
national interest of the United States.
Looking beyond the immediate economic implications, analysts have raised a number of other
potential implications of broader dollarization for the United States that would have to be very
carefully considered in the event of any major country in the region choosing to adopt the dollar.
In this context, there has of course been concern that dollarization by an economy would give rise
to pressure to use United States economic and regulatory policy tools to support that country's
economic or financial stability. Our stake in the region's economic stability has meant that we
have sometimes acted to support strong adjustments in policies in the wake of financial crises.
Some argue that dollarized economies achieved greater stability, thereby limiting the chances of
such involvement in the future. However, an opposing concern has also been raised, that
dollarized economies, and their potential creditors, might believe they had a stronger claim on
United States support.
Questions have likewise been raised about the possible impact of dollarization on the broader
attitude of that country and its citizens toward the United States. To the extent that it furthered
economic and other ties, this would clearly be a benefit to the United States and that country.
But there would be the opposing risk that in difficult times, the loss of domestic monetary
sovereignty would foster resentment and encourage policy makers to deflect blame for problems
onto the United States.
As Secretary Rubin said yesterday, we do not have an a priori view as to our reaction to the
concept of dollarization. There are a variety of means and modalities for achieving it and we
would expect to discuss these with any government seriously considering taking such a
momentous step. But there are certain limits on the steps that the United States would be
prepared to take in the context of such a decision. Specifically, it would not, in our judgment, be
appropriate for United States authorities to extend the net of bank supervision, to provide access
to the Federal Reserve discount window, or to adjust bank supervisory responsibilities or the
procedures or orientation of U.S. monetary policy in light of another country deciding to adopt
All of these dimensions both for countries considering dollarization and for the United States -
will no doubt play a role in future discussions of this issue going forward. As I have said, the
choice of which currency regime best suits them is a choice for countries to make themselves and
not one for the United States to prescribe. But if any country desires to consider adopting our
currency, we would welcome discussions between our respective authorities on the various issues
involved. Thank you. I would now welcome any questions that you might have.
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