INTRODUCTION

The dollar has become an international currency, used frequently in ordinary domestic transactions outside the United States. The extent to which the smaller Latin American countries have “dollarized” is fairly striking. For example, in Costa Rica's banking system, 61 percent of credit assets and 53 percent of interest-bearing liabilities are dollar denominated. Focusing on media of exchange rather than stores of value, 26 percent of checking account deposits and (less precisely) 30 percent of cash are in dollars. These numbers are biased downward, as they do not include the fairly extensive use by local businesses and consumers of foreign banks and the offshore subsidiaries of local banks. Many ads and contracts use dollars as the unit of account to post prices. The same phenomenon occurs in at least another dozen small Latin American countries. The process of dollarization has been relatively quick, and, although it started under high inflation, it has continued under price stability.

In some of these countries, there is debate about the possibility of eliminating their local monies entirely and using only the dollar as currency. In fact, in 2000 alone, two countries, El Salvador and Ecuador, formally made the decision to dollarize (joining Panama, which did so at the beginning of the century), and the discussion has been fairly intense in other places.