Henry and Paul,
There are three key problems to official dollarization as presently implementable.
First, the country needs to maintain on average a trade surplus and a capital flow surplus, or a combined surplus. The size of this surplus becomes a currency constraint on the economic multipliers in the economy.
Second, the currency , US dollars, has to be purchased or borrowed from the US or other nations. This increases the country's debt payments.
Third, because the currency, US dollar, does not reflect international competitive pricing in commodities and industrial goods, frequent price changes would be necessary; and long-term contracts would need to be written using an average international currency index. Long-term economic misallocation of resources and productivity could result.
In fact, it is doubtful that any reasonably sized developing country can meet the requirements associated with these three areas. Only if the US would regionalize its currency and central banking system will dollarization be possible in my opinion.
Argentina may be a unique situation. It will require extensive simulation studies to determine its suitability. The benefits of dollarization could easily outweigh the costs, especially , if these problem areas are addressed. Unfortunately, I think the solution requires regionalization either by the US or South America.
Skeet
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