Dollarization

Dollarization is the use of a foreign currency, often the United States dollar, within a country’s economy. It can range from informal use in transactions to official adoption as legal tender.

Official dollarization: A country’s formal adoption of a foreign currency as its principal or sole legal tender. It is the most complete form, replacing the domestic currency’s role in everyday payments.
Ecuadorian dollarization: Ecuador’s adoption of the United States dollar as legal tender in 2000. It is a prominent official response to a severe currency and banking crisis.
Monetary sovereignty: A state’s capacity to control its monetary institutions, currency, and monetary policy. Official dollarization limits a government’s ability to issue money and set its own monetary conditions.
Currency board: A monetary arrangement that fixes a domestic currency to a foreign currency and backs its issue with foreign reserves. Unlike dollarization, it retains a domestic currency while tightly limiting its issuance.
Unofficial dollarization: Widespread use of a foreign currency without its formal adoption as the country’s legal tender. It can take hold through private choices even while domestic money remains official.
Panama's monetary system: A monetary system using the United States dollar alongside Panama’s coinage, the balboa. Panama has used the dollar as its principal currency since its early republic.
Monetary policy: Central-bank actions that influence money, credit, interest rates, and economic activity. A dollarized economy inherits the currency issuer’s monetary conditions rather than setting them independently.
Fixed exchange rate: An exchange-rate system that maintains a currency’s value against another currency or a basket. A peg can seek stability without replacing domestic money with foreign currency.
Currency substitution: The replacement of domestic money by foreign currency for payments or as a store of value. It describes how residents shift currency use, a process that can precede formal dollarization.
El Salvador's dollarization: El Salvador’s adoption of the United States dollar as legal tender in 2001. Its formal change illustrates dollarization pursued without a preceding hyperinflation episode.

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