Fiscal
Dollarization
Definition
When a country officially adopts the US dollar (or another foreign currency) as legal tender, replacing or supplementing its domestic currency.
Explanation
Ecuador, El Salvador, and Panama use the US dollar as their official currency. Argentina has experienced unofficial dollarization as citizens hold savings in dollars to protect against peso devaluation. Dollarization eliminates exchange rate risk and can stabilize prices, but removes monetary policy flexibility — the country cannot adjust interest rates or print money to respond to economic shocks.