INTRODUCTION

This is a very good paper on some theoretical issues and many empirical aspects of dollarization, and it is great fun to read. The first part of my comments will briefly describe the main features and findings of Trejos' model, as well as its major limitations. Next, I will refer to some recent work that covers issues not addressed by the model but identified in the second, empirical section of Trejos' paper. Then I will briefly discuss issues that relate to dollarization in Latin America, before ending with a brief note on optimal exchange rate regimes.

THE MODEL

This paper develops a welfare-based evaluation of monetary regimes in a search-theoretic model for transactions money, describing various monetary and real equilibria in a two-country world. The model, extending previous work by Trejos and Wright, is meant to assess current issues in the hot debate about dollarization in some Latin American countries, issues that are discussed in the second part of the paper.

The model provides a stylized framework in which national and international monies are demanded to overcome the mismatch between different goods demanded and supplied by agents that engage in a costly search for a domestic or foreign trading partner. Domestic and foreign currencies are issued by monopolistic governments abroad and at home, respectively, but they have the potential to circulate freely and are used for buying both domestic and imported goods.