Newsletter Subscribe
Enter your email address below and subscribe to our newsletter
What is Dollarisation?
Dollarisation occurs when a country adopts a foreign currency (most commonly the US dollar) for domestic transactions, savings, or as legal tender, either partially or fully.
Definition
Dollarisation refers to the use of a foreign currency alongside or in place of a domestic currency to stabilise prices, restore confidence, or mitigate inflation and currency instability.
Key Takeaways
- Involves adopting a foreign currency for domestic use.
- Often emerges in response to hyperinflation or currency collapse.
- Can stabilise prices and inflation expectations.
- Limits a country’s independent monetary policy.
Understanding Dollarisation
Dollarisation typically arises when confidence in a domestic currency deteriorates due to high inflation, hyperinflation, or repeated currency crises. Households and businesses shift to a more stable foreign currency to preserve value and facilitate transactions.
There are different degrees of dollarisation. In informal or partial dollarisation, foreign currency is widely used without official legal status. In full dollarisation, a foreign currency becomes legal tender, replacing the domestic currency entirely.
While dollarisation can restore short-term stability, it reduces a country’s ability to conduct independent monetary policy and respond to economic shocks.
Importance in Business or Economics
- Helps stabilise prices in high-inflation environments.
- Reduces exchange rate risk for trade and investment.
- Constrains monetary policy flexibility.
- Central to discussions on currency reform and crisis management.
Types or Variations
- Official Dollarisation – Foreign currency adopted as legal tender.
- Partial Dollarisation – Foreign currency used alongside domestic currency.
- Financial Dollarisation – Foreign currency dominates savings and lending.
Related Terms
- Currency Collapse
- Hyperinflation
- Monetary Policy
- Exchange Rate Regime
Sources and Further Reading
- Investopedia — Dollarisation
- International Monetary Fund (IMF) — Exchange Rate Regimes and Dollarisation
- World Bank — Currency Stability and Reform
Quick Reference
- Adoption of foreign currency
- Response to inflation or currency instability
- Reduces monetary policy autonomy
Frequently Asked Questions (FAQs)
Why do countries adopt dollarisation?
To stabilise prices, restore confidence, and reduce inflation volatility.
Is dollarisation reversible?
Yes, but reversing it can be difficult and requires strong institutions and credibility.
Does dollarisation eliminate inflation?
It can reduce inflation significantly but does not eliminate other economic risks.
