Re: Dollarization -- Moore's argument

[LP Rochon <lprochon@xxxxxxxx>]

Dollarization may eliminate exchange rate risks, but country risk still
exists and can explain why there are different interest rates in the US and
other dollarized countries.

LPR

Colin Danby wrote:

> 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