Origins
After the gold standard was abandoned at the outbreak of World War I and the Bretton Woods Conference following World War II, some countries were desperately seeking exchange rate regimes to promote global economic stability and hence their own prosperity. Countries usually peg their currency to a major convertible currency. "Hard pegs" are extreme exchange rate regimes that demonstrate a stronger commitment to a fixed parity (i.e. currency boards) or relinquish control over their own currency (such as currency unions and dollarization) while "soft pegs" are more flexible and floating exchange rate regimes. When countries choose to use a major convertible currency parallel to or in place of their national currency, this is called the process of dollarization. The collapse of "soft" pegs in Southeast Asia and Latin America in the late 1990s led dollarization to become a serious policy issue.
A few cases of full dollarization until 1999 had been the consequence of political and historical factors. In all long-standing dollarization cases, historical and political reasons have been more influential than an evaluation of the effects of dollarization. Panama, the most salient dollarization example, adopted the U.S. dollar as legal tender after its independence as a result of a constitutional ruling. Ecuador and El Salvador became full dollarized economies in 2000 and 2001 respectively with different influential factors. Ecuador underwent the process of dollarization to deal with a widespread political and financial crisis resulted from massive loss of credibility in its political and monetary institutions. In contrary, El Salvador's official dollarization was as a result of internal debates and in a context of stable macroeconomic fundamentals and long-standing unofficial dollarization. The euro area adopted the euro (€) as their common currency and sole legal tender in 1999, which might be considered as a variety of a full-commitment regime similar to full dollariation despite of some differences distinguishable from other dollarization.
Read more about this topic: Dollarization
Famous quotes containing the word origins:
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—Robinson Jeffers (1887–1962)
“The settlement of America had its origins in the unsettlement of Europe. America came into existence when the European was already so distant from the ancient ideas and ways of his birthplace that the whole span of the Atlantic did not widen the gulf.”
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—W. T. Lhamon, U.S. educator, critic. “Material Differences,” Deliberate Speed: The Origins of a Cultural Style in the American 1950s, Smithsonian (1990)