Dollarization Dollarization,
which involves the adoption of another country’s currency, usually the U.S. dollar (but other sound currencies like the euro or the yen are also possibilities), is a more extreme version of a fixed exchange rate than is a currency board. A currency board can be abandoned, allowing a change in the value of the currency, but a change of value is impossible with dollarization: A dollar bill is always worth one dollar whether it is held in the United States or outside of it. Panama has been dollarized since the inception of the country in the early twentieth century, while El Salvador and Ecuador have recently adopted dollarization. Dollarization, like a currency board, prevents a central bank from creating inflation. Another key advantage is that it completely avoids the possibility of a speculative attack on the domestic currency (because there is none) that is still a danger even under a currency board arrangement. However, like a currency board, dollarization does not allow a country to pursue its own monetary policy or have a lender of last resort. Dollarization has one additional disadvantage not characteristic of a currency board: Because a country adopting dollarization no longer has its own currency, it loses the revenue that a government receives by issuing money, which is called seigniorage. Because governments (or their central banks) do not have to pay interest on their currency, they earn revenue (seigniorage) by using this currency to purchase income earning assets such as bonds. In the case of the Federal Reserve in the United States, this revenue is usually in excess of $20 billion dollars per year. If an emerging market country dollarizes and give up its currency, it needs to make up this loss of revenue somewhere, which is not always easy for a poor country.