Dollarization

Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency.

Dollarization can occur:

• unofficially, when private agents prefer the foreign currency over the domestic currency. They hold for example deposits in the foreign currency because of a bad track record of the local currency.

• semiofficially (or officially bimonetary systems), where foreign currency is legal tender, but plays a secondary role to domestic currency    * officially, when a country ceases to issue the domestic currency and uses only foreign currency. It adopts the foreign currency as legal tender.

The term dollarization is not only applied to usage of the United States dollar, but also generally to the use of any foreign currency as the national currency.

Until 1999, official dollarization received little attention because it was considered politically impossible, until it was implemented in Ecuador in December 2000 by then-president Jamil Mahuad, who was later ousted. Since then, official dollarization has gained prominence as several countries have considered and implemented it as official policy. The major advantage of dollarization is promoting fiscal discipline and thus greater financial stability and lower inflation.
The biggest economies (other than the US) to have officially dollarized as of June 2002 are Ecuador (since 2000), El Salvador (since 2001), and Panama (since 1904).