Foreign Currency with Legal Tender quality

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CulturedQuant

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Is it conveivable for a Third World country not to have their own currency and rely mainly on dollar/euro?

What do you think is the macro economic effect of giving dollar/euro legal tender quality, making it acceptable payment in daily transactions?

I mean dollar bill being accepted as payment for school maticulation or euro being accepted or bus fares? And change is handed back either in currency, dollar or euro?

Will this minimize foreign currency speculation?

Will this attract more investment?

Will this be good or bad for the national economy? How?
 
First, a government deciding that the country is not even going to print money and just rely on foreign currency would be a govt giving up their privilege of seignorage to richer developed countries. A govt that was so dysfunctional that it couldn't even figure out how to make a printing press to print its own interest free bonds is a govt that shouldn't be in charge.

Nearly everybody comes to that conclusion pretty quickly and then the next question is currency peg or not. The currency peg question has been debated to death and the asnwer is somewhere between "Hong Kong" and "Argentina". Basically, currency pegs can provide all kinds of economic benefits until an economy starts eating itself by not being able to use monetary policies to influence its own economy, or is unable to maintain the peg, or takes on someone else's monetary or even political problems because of the peg.



Edited 1 time(s). Last edit at Monday, June 25, 2007 at 05:04AM by JoeyDVivre.
 
You should share some of your thoughts about these issues instead of just posing questions. I enjoy interchange of ideas but not the essay question du jour.

Anyway, I suppose a viable peg is one that lasts. I would say the determinants for whether a peg is successful are:
a) Economic similarity between the two countries. China, Brazil, Argentina have had unsuccessful pegs because their economies are very different from the US economy
b) National commitment. Hong Kong has maintained the peg because they deeply care about it and will endure someone else's pain to keep it
c) As little democracy as possible. Currency pegs go when governments change. Some day EMU is going to break down, trampled by European democracy.
d) Lack of manufacturing. Industrialization kills currency pegs because manufactures get killed when their currency appreciates for no domestic reason. If they are powerful enough, they do it in.
e) Currency pegged to important trading partner(s). Much of the benefit from a currency peg happens from trade.

Probably a host of others...
 
Great insights Joey. As much I would love to see a pan North American currency regime with Canada and the US, and maybe someday when they've developed enough Mexico, I see it as extremely unlikely given all the problems the EMU has had with the Maastricht and the larger countries (read France and Germany especially abusing the fiscal policy rules and running large deficits).

Given Canada's stellar fiscal position (though it's getting worse) and the U.S.'s dismal position (though getting much better) and the relative size of the U.S. economy vs. our's, and who would have final say, I don't see a union that could work politically.

A peg on the other hand I think is much more plausible. Of course the manufacturing protectionists (who can't survive in the country without a cheap currnecy because of this country's dismal productivity) would cry bloody murder, but I say if you can't survive with a fair dollar, you can't survive.

Then there are those who say that the economic conditions of Canada and the U.S. are very divergent, and to that I say so are those of Ontario or Alberta, or Nevada and West Virginia.



Edited 1 time(s). Last edit at Wednesday, June 27, 2007 at 08:50AM by CFA_Halifax.
 
Yep, a single currency regime would be as successful as the Atlanta Flames or the Montreal Expos....
 
Don't forget the Birmingham Barricudas and the Sacremento Goldminers for all those CFL fans out there~!

I'm not sure what was a better idea, MLB in the Montreal, or NHL Hockey in the sunbelt?

In fairness, the Stars, Ducks, Canes and Lightning's cup victories would give them the edge. Of course the Xpos had 94...sorta



Edited 1 time(s). Last edit at Wednesday, June 27, 2007 at 10:39AM by CFA_Halifax.
 
When I was a youngster, I always thought that the Atlanta Flames were named that way because it's hot in Atlanta and flames look cool, like you put them on hot skaters or something. Then I learned that they named them that after the flames that engulfed the city after Sherman burnt it down. Nothing like naming your sports team something about destruction of your city.
 
nice. Now we only need the San Fran Quakes or my personal fav, The Halifax Explosion. Yes, people in this city have actually considered naming teams that!
 
Well there was the San Jose Earthquakes in MLS.

Hopefully the Predators will move to Hamilton, my hometown. I can catch a game when I visit my parents.
 
Weren't they originally from New Orleans, hence Jazz? What Lakers, I mean I know they were originally Minnesota, but come on, not too mnay major lakes in Southern Cal!

I don't think Bassille will get the Preds, he's pissed of Bettman too much and the rest of the NHL Board of Guvs. They won't let him move them easily, even though we all know Tennesse is a terrible place for hockey! Would love to see the "Hamilton or Kitchener Blackberries" someday though lol
 
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