https://johnhcochrane.blogspot.com/2023/11/pro-dollarization.html
Cochrane writes here mainly about the “how to” of dollarization, but I want to focus on the “why.” Cochrane does bring up one “why” (he says, “why not”) that is just wrong, what he calls the “standard of value.” No, it does not make sense for Argentina to state values of even “identical” things (Big Mac’s?) in the same currency units because few if any decision turns on the ease of making the comparison. Even for international trade, what is the additional cost to the soybean exporters comparing the dollar value exported to his costs stated in dollars or in pesos? Weights and measures are not supposed to vary according to circumstance, but the values of one currency relative to others ARE.
The value of having a national currency is that a central bank can engineer optimal inflation for that country. The US Fed is doing pretty darn good for us right now (after a little slip up in 2021 that allowed a bit more over-target inflation for maybe 9-month longer that was necessary to allow relative prices to adjust to the COVID-Putin shocks. It would be a weird coincidence if the inflation that is optimal for the US and its shocks to be optimal for Argentina and ITS shocks. Of course, for a small economy, there is little that inflation can do to affect relative prices for good or ill. The smaller the economy, the more relative prices are governed by prices of imports and exports, so there less role for a central bank. But Argentina is a much larger economy than Panama, El Salvador or Ecuador which have dollarized.
Cochrane’s principal reason for preferring Dollarization is that it can foreclose shocks coming from fiscal policy (if it is politically sustained) and it is not hard to imagine eliminating the shocks of bad fiscal policy might be well worth importing US inflation which would be sub-optimal for adjusting to other Argentina idiocentric shocks.
Cochrane’s choice of Greece during the Euro crisis being constrained from “bad” fiscal policy as an example should be a cautionary tale. During that crisis Greece needed expansionary monetary policy, inflation to facilitate the increase in the prices of tradeable goods relative to non-tradeable, not fiscal policy (“bad” or otherwise), but was constrained by “Euroization.” What if there were a serious decline in the prices of Argentina’s agricultural exports and it could not devalue because of dollarization!
Cochran’s discussion of the “how to” looks sound, but his apparent lack of awareness of the downside for Argentina of importing inflation that is (at best) optimal for the US, the lack of an explicit consideration of costs as well as benefits, should give pause.
ur stile is not so readable