Re: Dollarization -- Moore's argument

[LP Rochon <lprochon@xxxxxxxx>]

Well, even with a pegged currency, Argentina still suffers from country risk.
Argentinean bonds are not as "risk-free" as US bonds.  Second, I don't think
dollarization removes the need for a CB. Granted, the US would set the base rate,
but the central bank of Ecuador, for instance, can still set a number of other
over-night and other rates as a mark-up over the US rate.

LP

Basil Moore wrote:

> L-P
> Isn't this entirely a question of credibility? If dollarization is expected
> to last forever, and the banking system is sound and is subject to
> surveilance by the monetary authorities, why should there be any country risk?.
> Basil
>
> At 09:34 AM 4/30/01 -0400, you wrote:
> >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