Currency Regimes – Dollarization and Monetary Union

Two types of arrangements in which a country does not have its own legal tender.

Dollarization, the country uses the currency of another nation as its medium of exchange and unit of account.

Monetary union, members share the same legal tender.

Dollarization (E.g. East Timor, Ecuador, Panama)

By adopting another country’s currency as legal tender, a dollarized country inherits that country’s currency credibility, but not its credit-worthiness.

Monetary Union (E.g. the European Economic and Monetary Union (EMU))

Although member countries cannot have their own monetary policies, they jointly determine monetary policy through their representation at the European Central Bank (ECB).

Confer currency credibility on members, monetary union alone cannot confer credit-worthiness.