On the Sustainability of Euroisation/Dollarisation Regimes: How Important are Fiscal Transfers, Offshore Finance and Tourism Receipts?

Abstract

Euroisation/dollarisation – the replacement of the domestic currency by a foreign currency, mostly the US dollar or the euro – has regained significant popularity in recent years, as it is generally regarded as a viable ‘corner solution’ for exchange rate regimes. Part of its attractiveness is related to its alleged virtues of fostering greater economic integration with the anchor country, thereby endogenously supporting its sustainability. Support for this argument is often based on the positive experience of existing euroisation/dollarisation regimes and their close links with the respective anchor countries. This paper takes a closer look at the cases of sustained euroisation/dollarisation and highlights three special features that characterise many of these countries: substantial fiscal transfers from the anchor country, financial integration through offshore finance and real integration via the development of tourism activities. These special features might have been crucial in sustaining euroisation/dollarisation. Hence, some caution may be warranted when using this experience as evidence in favour of endogenous sustainability of this exchange rate regime. Comparative Economic Studies (2003) 45, 421–436. doi:10.1057/palgrave.ces.8100015