Dollarization – which I will use broadly to refer to the strategy of adopting some other country’s currency – takes the currency board one step further. Under a currency board, the threat remains that the government will abandon this arrangement and devalue the currency or let it float. Dollarization increases the commitment of a country to a fixed exchange rate.
Under dollarization, a country uses dollars for its domestic currency. It therefore faces dollar interest rates, although these rates will not necessarily be the same as those prevailing in the United States. Once again it has given up independent monetary policy.