Dollarization.

In plain English

Dollarization is the adoption of a foreign currency, most often the US dollar, for everyday transactions, savings, and the pricing of goods and contracts. Full or official dollarization means a country retires its own currency and makes the foreign one legal tender. Partial or unofficial dollarization happens on its own when people lose faith in the local money and start saving and quoting prices in dollars whatever the law says. The trade is stability for control: inflation usually falls hard, but the country gives up its own monetary policy and its central bank's ability to act as lender of last resort.

01Why it matters

For a household in a high-inflation country, holding dollars protects savings, but for the country it means interest rates are effectively set abroad by a central bank that is not looking at local conditions.

02The math, step by step

Say local inflation runs 40 percent a year. Savings of 1,000,000 in local money buy about 714,000 worth of goods a year later. Held in a currency with 3 percent inflation, the same value keeps roughly 97 percent of its purchasing power. That gap is why unofficial dollarization spreads without anyone passing a law.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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