Dollarization

AAA

DEFINITION of 'Dollarization'

A situation where the citizens of a country officially or unofficially use a foreign country's currency as legal tender for conducting transactions. The main reason for dollarization is because of greater stability in the value of the foreign currency over domestic currency. The downside of dollarization is that the country gives up its right to influence its own monetary policy by adjusting the money supply.

BREAKING DOWN 'Dollarization'

For example, the citizens of a country with an economy undergoing rampant inflation may choose to use a historically stable currency (like the U.S. dollar) to conduct day-to-day transactions, because inflation will cause their domestic currency to have reduced buying power in a relatively short amount of time. Dollarization does not always involve the U.S. dollar as the adopted foreign currency. The euro has also been adopted by non-EU members as its domestic currency.

RELATED TERMS
  1. Monetary Policy

    The actions of a central bank, currency board or other regulatory ...
  2. Inflation

    The rate at which the general level of prices for goods and services ...
  3. Currency

    A generally accepted form of money, including coins and paper ...
  4. Store Of Value

    Any form of commodity, asset, or money that has value and can ...
  5. Medium Of Exchange

    An intermediary instrument used to facilitate the sale, purchase ...
  6. Pegging

    1. A method of stabilizing a country's currency by fixing its ...
Related Articles
  1. Forex Education

    Dollarization Explained

    Find out how fledgling economies can find some stability in their currency and attract foreign investment.
  2. Forex Education

    The U.S. Dollar's Unofficial Status as World Currency

    Discover how and why the U.S. dollar emerged as official currency in many foreign countries.
  3. Economics

    Calculating the Consumption Function

    The consumption function shows the level of consumer spending as it relates to disposable income.
  4. Fundamental Analysis

    Examining Mexico's Trillion-Dollar GDP

    Examining the gross domestic product growth and composition of Mexico, the second largest economy in Latin America
  5. Fundamental Analysis

    What Causes Inflation in the United States

    Inflation is the main catalyst behind U.S monetary policy. But what causes this phenomenon of sustained rising prices? Read on to find out.
  6. Term

    Understanding Net Exports

    Net exports are the difference between a country’s exports and imports.
  7. Investing

    3 Reasons Why Countries Devalue Their Currency

    Ever since world currencies abandoned the gold standard and allowed their exchange rates to float freely against each other, there have been many currency devaluation events that have hurt not ...
  8. Active Trading Fundamentals

    The Top 5 Impact Investing Firms

    Learn what impact investing is and obtain information on some of the top impact investing firms ranked by total assets under management.
  9. Investing Basics

    Explaining Trade Liberalization

    Trade liberalization is the process of removing or reducing obstacles that impede the exchange of goods and services between nations.
  10. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
RELATED FAQS
  1. Is Japan an emerging market economy?

    Japan is not an emerging market economy. Emerging market economies are characterized by low per capita incomes, poor infrastructure ... Read Full Answer >>
  2. How is the Federal Reserve audited?

    Contrary to conventional wisdom, the Federal Reserve is extensively audited. Politicians on the left and right of a populist ... Read Full Answer >>
  3. Who decides when to print money in the US?

    The U.S. Treasury decides to print money in the United States as it owns and operates printing presses. However, the Federal ... Read Full Answer >>
  4. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  5. How does the bond market react to changes in the Federal Funds Rate?

    The bond market is highly sensitive to changes in the federal funds rate. When the Federal Reserve increases the federal ... Read Full Answer >>
  6. Which is more important to a nation's economy, the balance of trade or the balance ...

    There is no question the composition of a country's balance of payments is more important than its balance of trade. This ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  2. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  3. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  4. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  5. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  6. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!