Re: dollarization

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

The effect of dollarization fluctuates according to the relationship of
the adopting economy to the US economy and the fluctuating
characterisitics of the dollar itself. It cannot be a fixed formula.
During 1998, in the heat of the Asian financial crisis, dollarization
was widely discussed for Hong Kong, the linked exchange rate mechanism
of which (HK does not regard it as a currency board, and it technically
is not) and the speculation (unfounded expectation?) of sudden depegging
raise the prospect of dollarization as a way to terminate speculative
aatacks on the HK$.  The benefits of dollarization could not be
rationally determined beyond the short term because of the unknow future
of the dollar itself and the lack of sync between the US and HK
economies.  The effect of the hedge funds attack on the HK$ was such
that speculative future options caused the HK short term interest rate
to go up to 120% overnight and the Heng Seng Index to fall 6000 points.
For every 1000 point drop, the hedge funds were taking home US$1 billion
risk free market.  TheHK government had to step in and buy up 20% of the
equity market, spending US$18 billlion in two days of trading.  The
government still hold these shares.
The regulation were change to prevent banks to lend to hedge funds for
specullative attacks on the currency.  The neo-liberals attacked the HK
government for interferring with free market operations.  Of course, no
free market ever existed ubder the pegged currency regime to start with.

Henry C.K. Liu

Henry C.K. Liu

"J. Barkley Rosser, Jr." wrote:

>       There is an interesting new paper
> about dollarization available from NBER.
> It is "Dollarization, Inflation and Growth,"
> by Sebastian Edwards adn I. Igal Magendo,
> NBER Working Paper 8671, Dec. 2001,
> http://www.nber.org/papers/w8671.
>        The results are somewhat surprising,
> given Edwards' genearl conservatism and
> orthodoxy.  The findings are that dollarization
> have not been associated with faster growth,
> indeed quite the opposite.  The orthodox
> finding that it is associated with lower inflation
> seems to hold, however.  There seems to be
> no particular relation with volatility.
> Barkley Rosser