Dollarization

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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.

INVESTOPEDIA EXPLAINS '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.

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