Global Implications Of Dollarizing Economies To Attain Monetary Stability Essay, Research Paper
Global Implications of Dollarizing Economies to Attain Monetary Stability
Dollarization is when one country abandons its own currency in favor of
another country?s currency. This is good because it will provide a stable currency but
unfortunately the country who changed it?s currency has no monetary independence
and no power to print currency. This means that the country controlling the currency
may not keep in mind the affect actions may have on the secondary country?s
economy. This is an example of a fiscal policy because it deals with the way a
country handles its money. Other examples of fiscal policies are floating currencies,
pegged or currency board, and a monetary union. The two latter have what we call
fixed exchange rates. This is when currency rates dealing with trade is regulated and
doesn?t differ trade from trade. It helps the currency remain stable and dependent for
businesses. A currency board is one example of a fiscal policy that has a fixed
currency exchange. This situation is when a local currency is used but to instill
stability the local currency is backed by another currency held by a central bank. One
reason this system brings stability because a currency board can?t print money without
being able to back it up.
The Netherlands has a rather interesting monetary order because of
their environment. They have a current system where the local currency is Netherlands
guilders, gulden, or florins and this has had a fixed exchange rate with the US dollar
since 1989 of 1.79 gullden to US$1. There environment makes this interesting
because Netherlands was one of eleven countries to enter the European Union(EU), a
monetary union of European countries. This is important because the union just
introduced a common currency of the euro witch has a fixed rate of 2.20371 guilders
per euro. The euro will replace the local currency in consenting countries for all
transactions in 2002.
I don?t believe that the Netherlands has had a balance of payment crisis
in the recent past because their was a Dutch economic boom in 1996 that continued to
1997 and ever since 1989 the local currency has had a fixed exchange rate with the
US dollar. At the end of the economic boom the government was enjoying an increase
in tax revenue which led to increased prosperity and a sufficient reserve. This boom
has affected the inflation rates. The risk of inflation is greater now then it was but
even with one of the highest inflation rates in Europe, the average inflation of 2.5
percent is not yet cause for alarm.