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.