Question

What is dollarization (money substitution). Please explain as confirmation. How to measure: Tell us about the causes and possible consequences of dollarization.

Answer 1

Dollarization: Dollarization is a method of currency substitution where Dollar is used instead of or in addition to the domestic currency of a country. Dollarization is measured by numerous ways like calculating the value of foreign currency deposits in the domestic banking system, value of dollars held in various form of financial instruments and the dollar value of the GDP and NDP of a country.

Causes:

1. Dollarization is done when a country's domestic currency losses its value in real terms to a greater extent and when the economy of that country becomes unstable due to this.
2. Hyperinflation is one of the main reason for rendering value of a country's currency to useless.
3. When Monetary policies of a country fail, It will outsource the regulation of monetary policy by way of dollarisation.

Possible Consequences:

1. Dollarisation help in Stabilisation of Economy and it restores the buying power of citizens
2. Dollarising country losses its control over its own monetary policy and stabilising the economy by way of adjusting the money supply in the country.
3. US may design monetary policies which is beneficial for US economy but it may not be useful for other dollarized economies

Please give me a like if you find this answer helpful! Let me know if you have any doubts in the comments section. Happy to help!