Dollarization

Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency.

Dollarization can occur

unofficially, without formal legal approval
semiofficially (or officially bimonetary systems), where foreign currency is legal tender, but plays a secondary role to domestic currency
officially, when a country ceases to issue the domestic currency and uses only foreign currency.

Dollarization can refer not only to the use of the US dollar, but to the use of any foreign currency as the national currency.

Until 1999, official dollarization received practically no attention because it was considered politically impossible. Since then it gained prominence after several countries have considered and implemented it as official policy. The major advantage of dollarization is to promote greater financial stability and a lower inflation rate.

The most important officially dollarized economies as of June 2002 were Ecuador (since 2000), El Salvador (since 2001) and Panama (since 1904).

As of August 2005, the United States dollar, the Euro, the New Zealand dollar, the Turkish lira, the Swiss franc and the Australian dollar were the only currencies used by other countries for official dollarization.

See also: American currency union