Economist Frederic Emam Zade favors a model of ?individual dollarization,? the process whereby the choice of dollarizing prices is decided by the individual business or person ? not by any government body. Such a system would not entail any costs or new debt to the government, or to the banking institutions. He proposes going one step further than what has already been taking place the DR, however, where many prices are already set in the US currency and where increasingly more transactions are being carried out in hard currency.
Emam Zade writes that since the two currencies are already circulating freely, ?The key is to recognize this situation and establish two monetary policies, one for pesos and another for dollars,? he explains. He says that a restrictive monetary policy should be in place to reduce the amount of pesos in circulation, while an expansive one should be implemented for the circulation of dollars, with an annual 15% cap on the increase in money supply of both currencies.
Emam Zade says that the Monetary Board should issue resolutions to officialize this dual monetary policy and to allow banks to lend and attract a greater number of dollars. Banks would be able to offer their clients the option of an account in either currency, with clients able to deposit, draw checks and borrow in dollars. ?The government would only require minimum legal exchange reserves on these deposits to promote the creation of dollars, as the Europeans did when they created their own Eurodollars,? he explained.
The positive consequences of these measures could be a lowered inflation, lesser interest rates, a relative abundance of dollars and, as a result, a strengthened peso without recessive implications on the economy, he explains. ?If this individual dollarization is accompanied by austerity, an improvement in the quality of government spending and a reduction in taxes, it could contribute to stabilize the economy and propel the country out of stagflation, or the recession plus inflation in which it is immersed at present.?
Emam Zade is the-director of economic development at the Fundacion Global Democracia y Desarrollo, the think tank and research center presided over by President-elect Leonel Fernandez.
To read more about the recent debate on dollarization, see:
http://dr1.com/forums/showthread.php?t=31718