Addicted to Dollars

Many emerging market economies are dollarized in varying degrees. How important is this for the conduct of monetary policy and choice of exchange rate regime? We propose a composite measure of dollarization, identify its major trends, and ascertain its impact on the effectiveness of monetary and exchange rate policy. We find that, contrary to the presumption in the literature, a high degree of dollarization does not pose an obstacle to monetary control or to disinflation. A high level of dollarization does appear to increase exchange rate pass-through, reinforcing the claim that "fear of floating" is a greater problem for highly dollarized economies.