Dollarization

The term dollarization is shorthand for the use of any foreign currency by another country (it does not have to be the U.S. dollar).

Most developing countries have a limited, unofficial form of dollarization. To a greater or lesser degree, their residents hold foreign currency and foreign currency-denominated deposits at domestic banks. In high inflation countries, dollars or some other hard currency may be in widespread use in daily transactions, alongside the local currency.

In a full dollarization, a country officially adopts the currency of another for all financial transactions, except perhaps the need for coins. Recent examples include Ecuador, El Salvador, Kosovo and Montenegro.

Dollarization and inflation
Countries which sustained high inflation often experience dollarization. A government that has grossly abused its monopoly over the currency and payments system will often find this monopoly more difficult to enforce in the aftermath. Reducing dollarization and regaining control of monetary policy is often one of the major aims of disinflation policy after a period of elevated inflation. Yet de-dollarization can be extremely difficult. This is especially true for countries with repeated bouts of high inflation.