If you need an accessible version of this item please contact JSTOR User Support

Dollarization and the Integration of International Capital Markets: A Contribution to the Theory of Optimal Currency Areas

Valerie R. Bencivenga, Elisabeth Huybens and Bruce D. Smith
Journal of Money, Credit and Banking
Vol. 33, No. 2, Part 2: Global Monetary Integration (May, 2001), pp. 548-589
DOI: 10.2307/2673916
Stable URL: http://www.jstor.org/stable/2673916
Page Count: 42
  • Download PDF
  • Cite this Item

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

If you need an accessible version of this item please contact JSTOR User Support
Dollarization and the Integration of International Capital Markets: A Contribution to the Theory of Optimal Currency Areas
Preview not available

Abstract

We consider the following questions: (1) Does the adoption of a common currency either reduce or enhance the scope for endogenously generated volatility to emerge? (2) Does the adoption of a common currency reduce or enhance the scope for indeterminacies to arise? (3) Is there a welfare justification for the adoption of a single currency? (4) What are the fiscal consequences of a move to a single currency? We address these issues in a two-country model with both a transactions role and a store-of-value role for currency. Moreover, banks arise endogenously in each country. In this context we compare the determination and characteristics of an equilibrium in each of two situations: one where each country issues its own currency, and one where one of the countries adopts the currency of the other country. The consequences of this "dollarization" depend very much on the degree of integration of the capital markets of the two countries. When their credit markets are poorly integrated, a regime with two currencies displays a unique stationary equilibrium. Dollarization, under very weak conditions, gives rise to a continuum of equilibrium paths. These may exhibit oscillation. Hence, when capital markets are segmented, dollarization may be a source of indeterminacy and endogenously arising volatility. In addition, the welfare justifications for dollarization are weak, and dollarization my have adverse fiscal consequences. When credit markets are fully integrated internationally, the results are substantially different. In that case, both regimes display a unique equilibrium path. Hence, in the presence of unrestricted international capital flows, the adoption of a common currency does not affect the scope for indeterminacy. However, dollarization may still-albeit under relatively extreme conditions-allow "excess volatility" to be observed.

Page Thumbnails

  • Thumbnail: Page 
[548]
    [548]
  • Thumbnail: Page 
549
    549
  • Thumbnail: Page 
550
    550
  • Thumbnail: Page 
551
    551
  • Thumbnail: Page 
552
    552
  • Thumbnail: Page 
553
    553
  • Thumbnail: Page 
554
    554
  • Thumbnail: Page 
555
    555
  • Thumbnail: Page 
556
    556
  • Thumbnail: Page 
557
    557
  • Thumbnail: Page 
558
    558
  • Thumbnail: Page 
559
    559
  • Thumbnail: Page 
560
    560
  • Thumbnail: Page 
561
    561
  • Thumbnail: Page 
562
    562
  • Thumbnail: Page 
563
    563
  • Thumbnail: Page 
564
    564
  • Thumbnail: Page 
565
    565
  • Thumbnail: Page 
566
    566
  • Thumbnail: Page 
567
    567
  • Thumbnail: Page 
568
    568
  • Thumbnail: Page 
569
    569
  • Thumbnail: Page 
570
    570
  • Thumbnail: Page 
571
    571
  • Thumbnail: Page 
572
    572
  • Thumbnail: Page 
573
    573
  • Thumbnail: Page 
574
    574
  • Thumbnail: Page 
575
    575
  • Thumbnail: Page 
576
    576
  • Thumbnail: Page 
577
    577
  • Thumbnail: Page 
578
    578
  • Thumbnail: Page 
579
    579
  • Thumbnail: Page 
580
    580
  • Thumbnail: Page 
581
    581
  • Thumbnail: Page 
582
    582
  • Thumbnail: Page 
583
    583
  • Thumbnail: Page 
584
    584
  • Thumbnail: Page 
585
    585
  • Thumbnail: Page 
586
    586
  • Thumbnail: Page 
587
    587
  • Thumbnail: Page 
588
    588
  • Thumbnail: Page 
589
    589