Understanding Dollarization

1A Primer on Dollarization

1.1Introduction

Traditionally, each country and economic territory has issued and circulated its own currency. By its most common definition, a currency is a form of fiat money issued by a government and used within a certain economic region. Money can be described by its functions as a medium of exchange (to buy and sell goods and services), as a unit of account (to keep track of revenues, costs and profits), and as a store of value (to save, and smooth consumption over time).

However, it is important to note that in an increasingly globalized marketplace, where not only goods and services but also people and capital move across borders, governments have lost their monopoly over the currency used among their citizens. ...