Re: Dollarization -- Moore's argument

[Basil Moore <bjm@xxxxxxxxxxxxxxxx>]

Matias

My point is solely that with dollarization, one does not need any mechanism
to "reduce the current account deficit". For example CT. could be running a
current account deficit with the rest of the US.(deficit on current
account), and also experience capital outflows (on capital account). So
what?  With a single currency (provided the single currency, e.g.
dollarization, is credible), a country like an economic unit can continue
to run a deficit on both current and capital account, in the sense of
demanding additional consumption and capital goods, so long as another
party is willing to provide deficit financing.

Of course such deficit financing implies a deficit on capital account, as
an accounting definition. Neither an agent nor a country can have
simultaneously a deficit on current and capital account.

I am not (yet) persuaded that dollarization is desirable, for all
countries, or for any single country. My point is simply that it removes
the necessity of pursuing demand restriction to reduce a current account
imbalance. So long as an economic unit or a country has, or simply is
believed to have, good future prospects, so that others are willing to sell
it things on credit.i.e. provide it with loans, it can continue to run
deficits indefinitely, and is not constrained because it is running out of
foreign exchange reserves.

Basil





At 11:07 AM 4/30/01 -0400, you wrote:
> precisely because country risk still exists, balance of payments
> problems
> do not disappear.  capital flows may go in the wrong direction. that
> is, a
> dollarized country with a current account deficit may face capital
> outflows.
> in the absence of the devaluation alternative, contraction would be the
>
> only mechanism to reduce the current account deficit.  that is the
> sort
> of bp adjustment of peripheral countries during the gold standard.
> matias
>
> ___________________
> Matias Vernengo, Ph.D.
> Assistant Director
> Center for Economic Policy Analysis
> New School University
> 80 Fifth Avenue, 5th Floor
> New York, NY 10011
> Tel:  212-229-5901
> Fax: 212-229-5903
>
> >>> lprochon@xxxxxxxx 04/30/01 09:34AM >>>
> 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