Re: Dollarization

["Alan G. Isaac" <aisaac@xxxxxxxxxxxx>]

aisaac said:
>> If Greenspan were setting Argentina's interest rates,
>> and if the currency board were completely credible,
>> Argentina would have the same interest rates as the US.

On Wed, 6 Dec 2000, Colin Danby wrote:
> 3. Can you unpack "credible"?  What is the implicit political economy?
> What are the implicit institutional assumptions?  I would humbly suggest
> that this "completely credible" is impossible, given that the Argentine
> central bank cannot make dollars.

Institutional arrangements of course drive credibility.
The difficulties in achieving high credibility for a
currency board speaks in favor of dollarization, but
*increased* credibility can nevertheless be achieved
by sticking closer to a traditional currency board
arrangement.  (True 100% backing, rather than
Argentina's arrangement.)

But my point was rather different.  I was merely noting
that attempting to pin Argentina's current interest rates on
the Fed is problematic.  I was pointing out that Argentina's
domestic institutions and conditions are important.

On a different topic:
You took issue with my comment that one point of
dollarization is to depoliticize monetary policy,
noting in effect that there are political considerations
in the formation of all policy.  Of course. Nevertheless,
I think there is a common sense reading of my claim.  Perhaps it
is clearer if I say that dollarization can offer
some protection against the short-run political vagaries
that have tormented Latin American monetary policy.
While no policy can be implemented in a political vacuum,
of course, this still suggests a natural understanding
of how dollarization would depoliticize monetary policy.
Just as we can understand why Ulysses would tie himself
to the mast to prevent his destruction by short-term impulses,
we can understand why dollarization may be chosen to
depoliticize monetary policy *in this sense*.

Alan