Dollarization -- Moore's argument

[Colin Danby <danbyc@xxxxxxx>]

Three quick notes on Basil's note to Barkley.

> When a country dollarizes, it ceases completely to have balance of
payment
> problems vis-a-vis the US,

Balance of payments "problems" or "imbalances" is too vague for a useful
discussion.  How exactly are these terms being used here?

> irrespective of differences between the two
> economies. i.e. it becomes like Connecticut and the rest of the
States.

This cannot be meant seriously.  One of the things binding Connecticut
to the rest of the US is a single banking system supported by the Fed,
and ultimately the taxing power of the U.S. government.  The Fed does
not backstop Ecuadoran banks.

> 1.) There is the fact that all areas using the same currency must have
a
> the same interest rate.

I have already discoursed on this at length; let me just point out that
differences in risk will persist, they may even be heightened if the
dollarized country's banks are susceptible to runs, as they must be if a
country adopts a currency its central bank cannot make.  Check out
current interest rates in Ecuador if you want a counterexample to the
above statement.

Best, Colin