The U. S. Dollarization Approach to Regional Currency Consolidation: Second-Best in the Short Run, Doomed in the Long Run

Free movement of capital and trade in financial services are driving regional currency consolidation. We compare the relative merits of adopting an international currency unilaterally or multilaterally. While EMU is the exemplar of the multilateral approach characterized by assured seignior age sharing and co-management of the joint monetary asset, unilateral monetary unions are represented by the proposed formal dollarization of some countries in Latin America. This paper finds that while such dollarization could be useful for the period ahead, it carries the seeds of its own destruction because peripheral countries that lose their currency need not support this one-sided arrangement indefinitely