IS DOLLARIZATION A GOOD OPTION FOR CURACAO?
Historically (at least since 1971) Curacao, as part of the Netherlands Antilles, has maintained a fixed exchange rate vis a vis the US dollar, since most of its trade is with the United States. The maintenance of a fixed exchange rate regime has meant that some exchange controls have had to be maintained.
DOLLARIZATION: What is it?
‘Dollarization’ is an extreme exchange arrangement in which the country elects not to have a domestic currency at all and instead chooses to use the currency of another country as its legal tender and unit of account. Dollarization is not to be confused with participation in a Currency Union or Common Currency arrangement. However, Dollarization is by definition a relationship of unequals: a hierarchical structure with just one country, the United States, firmly in charge. There is one common currency, the US Dollar. There is one central bank, the Federal Reserve, accountable to America alone. Dollarization is also not to be confused with a Currency Board arrangement.
The case for dollarization:
Dollarization actually makes sense for micro-states embedded economically, culturally and geographically within or near a much larger state and for which (a) sovereignty is not a major issue of identity and independence, and (b) the cost of issuing and managing its own currency is simply not worth it. A second circumstance, in which Dollarization may be indicated as beneficial, is where the country has experienced hyperinflation, where prices Increase at over 50% per month, doing serious damage to an economy. It is difficult to stop and sometimes the only way to stabilize the economy is to abandon the domestic currency and dollarize, e.g. Zimbabwe. The third circumstance where dollarization may be considered is in order to maintain low nominal domestic interest rates by adopting the monetary policy of a low inflation country (the USA) and eliminating currency risk.
The fourth case for...