Matthew CalvilloFinancial Institutions and MarketsDr. Crowe28 April 2014Doesdollarization benefit developing countries?It has long been taken for granted that all countries should have their own national currency for reasons ranging from trade issues to tax revenues and other financial variables. Analyzing the argument in support of trade issues it can be stated that the flexibility of changing the exchange rate allows national government authorities to alter relative prices by depreciating the national currency in such a way as to encourage exports and at the same time discourage imports. There are several arguments on the financial side, all related to the ability of central banks to print money and their power to adjust the value of their currency, thus pushing them to detach domestic financial markets from the conditions established in international ones, and to perform as a lender of last resort when a crisis threatens the national financial system. Seigniorage, which implies that the national government can tax the national currency, is certainly an issue from a tax perspective. If the need arises for more money in the form of notes and coins, the government can produce them as “interest-free” coins and notes and can do with them as it sees fit. Most, if not all, of these advantageous characteristics are threatened when a country decides todollarize. It can be argued thatdollarization is a legitimate option for developing nations for a couple of reasons. The first reason is that opinions in favor of the local currency are not as strong as they seem in reality. A country's ability to print money has brought not lower, but higher interest rates in most countries... middle of the paper... such methods have led not only to periodic spikes in high inflation, disastrous devaluations and financial difficulties, but also to persistently high nominal and real interest rates. The possibility of devaluation precludes integration into global financial markets. The power to devalue has not catapulted exports in the long term. In reality it is quite the opposite. It has taken steps to lock developing countries into low-value-added products exposed to large and unpredictable price changes. The country of El Salvador calculated the pros and cons of having a national currency through two consecutive administrations and, ultimately, chose todollarize based on their critical examination. Some countries may find it practical to conduct their own analysis, while others may find it useful to embrace the monetary services provided by the global dollar-based economy..