Dollarization and the Lender of Last Resort

Source: American Institute for Economic Research
by Nicolas Cachanosky

“Javier Milei, the surprising frontrunner in Argentina’s presidential primaries, has a bold plan for reducing inflation: getting rid of the peso altogether. His proposal, which involves adopting the US dollar as the official currency of Argentina, is gaining traction. The allure of Milei’s dollarization proposal rests on its simplicity: Since Argentina struggles to produce monetary stability, it should just import its monetary policy. Earlier dollarization efforts in Ecuador and Zimbabwe show how fast adopting the dollar can make high inflation rates converge to US levels. Some are concerned that dollarization would leave Argentina without a lender of last resort and, in doing so, remove any hope of achieving financial stability. The classic lender of last resort doctrine maintains that a central bank can promote financial stability by lending freely to solvent but illiquid financial institutions on good collateral at a penalty rate of interest.” (09/11/23)