Dollarization - Financial definition
Concise definition of the term dollarization
Dollarization is the process by which a country adopts the US dollar as its official currency, either entirely or alongside its own national currency, to stabilize its economy.
Comprehensive definition of the term dollarization
Dollarization occurs when a country facing economic instability, such as hyperinflation or lack of confidence in its own currency, opts to use the US dollar to ensure monetary stability. This can take two forms: full dollarization, where the US dollar completely replaces the national currency, and partial dollarization, where it is used alongside the local currency for major transactions.
Practical examples include Ecuador and El Salvador, which have fully dollarized their economies. Market practices often involve using the dollar for pricing, saving, and international trade, helping to reduce exchange rate risk and inflation, but also leading to a loss of independent monetary policy.