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The Dollarization of a Small Economy

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  • Lamdany, Ruben
  • Dorlhiac, Jorge

Abstract

Within a utility maximizing framework, the authors study the effects of repl acing the national currency with the dollar in a small, open economy. The impact effect is a drop in the levels of liquidity and wealth. The economy reaccumulat es real balances by reducing consumption and showing a trade surplus. The welfar e implications of the program depend on thesocial rate of time preference and t he inflation rate differential. The authors show that the United States can impr ove both its own welfare and that of the small country by "bribing" it into switching currencies, and study how these results change with the introduction of capital mobility. Copyright 1987 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Lamdany, Ruben & Dorlhiac, Jorge, 1987. "The Dollarization of a Small Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 89(1), pages 91-102.
    • Handle: RePEc:bla:scandj:v:89:y:1987:i:1:p:91-102
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    Cited by:

    1. Julide Yildirim, 2003. "Currency Substitution and the Demand for Money in Five European Union Countries," Journal of Applied Economics, Universidad del CEMA, vol. 6, pages 361-383, November.
    2. Zou, Heng-Fu, 1993. "Dollarization and inflation in a two-country optimization model," Journal of International Money and Finance, Elsevier, vol. 12(2), pages 209-220, April.
    3. Leigh A. Gardner, 2014. "The rise and fall of sterling in Liberia, 1847–1943," Economic History Review, Economic History Society, vol. 67(4), pages 1089-1112, November.
    4. Alberto Giovannini & Bart Turtelboom, 1992. "Currency Substitution," NBER Working Papers 4232, National Bureau of Economic Research, Inc.

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