Re: Dollarization -- Moore's argument

[Basil Moore <bjm@xxxxxxxxxxxxxxxx>]

Colin

Believe it or not, I am serious. But I am also ignorant, and open to
persuasion and even dissuasion.

I mean Current Account deficits or surpluses by B of P imbalances.

There will be no role for a local CB to set interest rates, but it still
must oversee and exercise surveilance over the local banking system, re
capital adequacy, etc,
This should assure no extra lenders risk, and there will be no exchange
rate risk if dollarization is credible. The CB can still act as lender of
last resort to provide system liquidity, as at present. It is just that it
can no longer set the rate.

Think of a branch bank. Under dollarization we no longer have to ensure
that each branch has no deficit or surplus, and depress the local economy
if it should run a deficit.

Best
Basil

At 06:02 PM 4/29/01 -0700, you 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