Dollarization

Official dollarization occurs when a country formally adopts a foreign currency as legal tender, giving up its own. Ecuador adopted the US dollar in 2000, and El Salvador in 2001. Panama has used the dollar for over a century. Some countries use the euro in a similar way.

Unofficial dollarization occurs when residents hold savings, price goods or make payments in a foreign currency, while the local currency remains official. This often happens in countries with high inflation or unstable currencies, where people lose trust in local money.

For example, in a country with very high inflation, shops might price expensive goods in US dollars, and people might keep savings in dollar bank accounts to protect their value.

Dollarization can bring stability and lower inflation, but the country gives up its own monetary policy and the ability to set interest rates or devalue its currency in a crisis. It also loses the income a government earns from issuing its own money.