The developing and emerging economies are increasingly realizing the inevitable vulnerabilities of having a floating exchange rate system. The other options open are, fixing the currencies with currency boards, currency unions or pegging with the leading regional currency, e.g., the dollar. Among these alternatives, is dollarization a better choice?

Even a few years ago, a country voluntarily giving up its own currency in favor of the dollar or euro was politically and socially disgraceful. Economies around the world always considered their respective currencies to be their national pride. The idea for a national currency makes about as much sense now-a-days as having own airline or nationalized banks. They are nice as symbols but are not absolute necessary in this age of globalization. Indeed, the mood is different today. Countries like Mexico and Argentina have embraced the dollar as their official currency rather than having a floating exchange rate system. The other American countries are also seriously thinking the possibility of setting up regional currency unions, boards, or cooperatives to avoid the vagaries of a floating exchange rate system.

The adaptation of the US dollar as the official currency in other nations, known as dollarization, has recently become a topic of significant debate. Though it is referred to as dollarization, it can involve the adaptation of any other currency, the euro, the yen, etc. The vital issue involved in dollarization revolves around the question whether the potential benefits of adapting the dollar are more than the costs involved.