I would recommend to the bigger economies a true currency board (like it was in Bulgaria) backed with about 130-140% reserves within the central bank. The Bulgarian currency board worked well for about 28 years until we adopted the euro. The important thing is the central bank not to be allowed to finance government deficits at all. Direct dollarization... will spoil you, Americans. All Americans, not just your politicians. "Dollar is ours, problems are yours." This kind of mindset actually accumulates problems at your side too.
Currency board worked well in HK and can work in other countries but its only as durable as the next election. Carlos Menem was Pres of Argentina in the 90s and successfully implemented a currency board. You could go to an ATM and choose $20 or 20 pesos. Then one day it changed and your peso accounts were worthless (drastically devalued). The rest is history.
Carlos Menem's "board" was just an exchange rate peg - this is why it failed. But you are right to suspect that even a true currency board might be abolished after next election. If I am an Argentinian politician I would try to propose the following approach for establishing a true currency board - referendum. And if the referendum says so, the currency board would to be arranged within the Constitution. This approach is democratic, it respects sovereignty and national pride. I cannot imagine something more stable and this is the right political moment to be tried.
The direct dollarization is a technocratic kind of solution, frankly this is why I don't like it. It would create negative anti-American sentiments in the future. And it could also be abolished easily after landslide elections with economicly-populist outcome.
Thanks for the feedback. I didn’t look, but I suspect that like the US, Argentina’s constitution may not be readily amended- on the other hand, this aligns well with you preference for obtaining broad public support. Argentina definitely has an undercurrent of anti Yanqi sentiment, although as I believe Cochrane noted, the dollar is preferred as the defacto currency now. But I’m not sure I believe a dollarization would be so easily undone in the future. I guess it depends on its success in bringing stability and specifically are there (anticipated or unforeseen) knock-on effects such as a steep financial recession. But even then, I wonder if the Peronist’s run on an explicit program to abolish the dollar and how practical to implement. Alternatively, they could probably mandate a switch to the Euro fairly easily. I’m a little surprised Milei hasn’t followed through on dollarization.
@Ivan I'm curious for you to elaborate further. Bulgaria Euroized v Dollarized but other than the selection of the reference currency, the effect is the same. Ultimately, it seems the political system held and then currency board succeeded. Why keep/abandon the currency board?
The principal advantage to a currency board is the ability to hedge a permanent peg to a single currency. The Dollar and Euro have performed comparably as stores of value. If you are Bulgaria, going all in on the Euro makes sense in that situation. If you are not next door (Africa/S America/SEAsia) the dollar is probably preferable. If I were designing a currency board for a country with a tradition of institutional stability I'd build a commodity basket of Petro, Ag, and metals etc) but there aren't too many candidates for that- Maybe Chile could do it, especially given its copper mining and ag dependence.
Dollarization may make sense for countries that have destroyed monetary credibility through repeated inflation, fiscal dominance, and failed central banking. In that sense, Cochrane’s “precommitment” argument is strong.
But dollarization should not be treated as a purely technical monetary reform. It is also a form of geopolitical and institutional incorporation into the dollar system.
For Argentina or Venezuela, it may reduce inflationary discretion and import credibility. But it also shifts adjustment from exchange-rate depreciation and inflation toward fiscal austerity, wage-price adjustment, external financing constraints, and deeper dependence on U.S.-centered banking, payments, liquidity, and legal infrastructure.
That is why the Cato framing matters. In the Western Hemisphere, dollarization is not only about monetary stability. It is also about the United States re-anchoring regional financial order at a time when China, commodities, infrastructure finance, and geopolitical competition are reshaping Latin America.
There are disadvantages to dollarizing, but while acknowledging your point in p3, I'd argue that for most countries outside the G20, those costs are there regardless of a national currency. It didn't help Indonesia, Malaysia etc after 1997. Arguably there are costs being within the US/UK architecture, but mainly they attach to renegade malign countries like Iran. What countries are likely to be afoul that system? Maybe Syria, Turkey and Philippines have come closest over last 20 years. All citizens would have probably benefited, I think, if their leaders had been hemmed in.
It’s been time for ages but the US may actually help it to happen.
I would recommend to the bigger economies a true currency board (like it was in Bulgaria) backed with about 130-140% reserves within the central bank. The Bulgarian currency board worked well for about 28 years until we adopted the euro. The important thing is the central bank not to be allowed to finance government deficits at all. Direct dollarization... will spoil you, Americans. All Americans, not just your politicians. "Dollar is ours, problems are yours." This kind of mindset actually accumulates problems at your side too.
Currency board worked well in HK and can work in other countries but its only as durable as the next election. Carlos Menem was Pres of Argentina in the 90s and successfully implemented a currency board. You could go to an ATM and choose $20 or 20 pesos. Then one day it changed and your peso accounts were worthless (drastically devalued). The rest is history.
Carlos Menem's "board" was just an exchange rate peg - this is why it failed. But you are right to suspect that even a true currency board might be abolished after next election. If I am an Argentinian politician I would try to propose the following approach for establishing a true currency board - referendum. And if the referendum says so, the currency board would to be arranged within the Constitution. This approach is democratic, it respects sovereignty and national pride. I cannot imagine something more stable and this is the right political moment to be tried.
The direct dollarization is a technocratic kind of solution, frankly this is why I don't like it. It would create negative anti-American sentiments in the future. And it could also be abolished easily after landslide elections with economicly-populist outcome.
Thanks for the feedback. I didn’t look, but I suspect that like the US, Argentina’s constitution may not be readily amended- on the other hand, this aligns well with you preference for obtaining broad public support. Argentina definitely has an undercurrent of anti Yanqi sentiment, although as I believe Cochrane noted, the dollar is preferred as the defacto currency now. But I’m not sure I believe a dollarization would be so easily undone in the future. I guess it depends on its success in bringing stability and specifically are there (anticipated or unforeseen) knock-on effects such as a steep financial recession. But even then, I wonder if the Peronist’s run on an explicit program to abolish the dollar and how practical to implement. Alternatively, they could probably mandate a switch to the Euro fairly easily. I’m a little surprised Milei hasn’t followed through on dollarization.
@Ivan I'm curious for you to elaborate further. Bulgaria Euroized v Dollarized but other than the selection of the reference currency, the effect is the same. Ultimately, it seems the political system held and then currency board succeeded. Why keep/abandon the currency board?
The principal advantage to a currency board is the ability to hedge a permanent peg to a single currency. The Dollar and Euro have performed comparably as stores of value. If you are Bulgaria, going all in on the Euro makes sense in that situation. If you are not next door (Africa/S America/SEAsia) the dollar is probably preferable. If I were designing a currency board for a country with a tradition of institutional stability I'd build a commodity basket of Petro, Ag, and metals etc) but there aren't too many candidates for that- Maybe Chile could do it, especially given its copper mining and ag dependence.
Your thoughts appreciated.
Of potential interest: https://direct.mit.edu/books/edited-volume/2099/DollarizationDebates-and-Policy-Alternatives
Wow! That's a treasure trove to digest. Thanks for posting.
Dollarization may make sense for countries that have destroyed monetary credibility through repeated inflation, fiscal dominance, and failed central banking. In that sense, Cochrane’s “precommitment” argument is strong.
But dollarization should not be treated as a purely technical monetary reform. It is also a form of geopolitical and institutional incorporation into the dollar system.
For Argentina or Venezuela, it may reduce inflationary discretion and import credibility. But it also shifts adjustment from exchange-rate depreciation and inflation toward fiscal austerity, wage-price adjustment, external financing constraints, and deeper dependence on U.S.-centered banking, payments, liquidity, and legal infrastructure.
That is why the Cato framing matters. In the Western Hemisphere, dollarization is not only about monetary stability. It is also about the United States re-anchoring regional financial order at a time when China, commodities, infrastructure finance, and geopolitical competition are reshaping Latin America.
There are disadvantages to dollarizing, but while acknowledging your point in p3, I'd argue that for most countries outside the G20, those costs are there regardless of a national currency. It didn't help Indonesia, Malaysia etc after 1997. Arguably there are costs being within the US/UK architecture, but mainly they attach to renegade malign countries like Iran. What countries are likely to be afoul that system? Maybe Syria, Turkey and Philippines have come closest over last 20 years. All citizens would have probably benefited, I think, if their leaders had been hemmed in.