Dollarization and the Multiple Currency Phenomenon in Lao PDR: Costs, Benefits and Policy Options

The multiple currency phenomenon (MCP) in Lao PDR has both costs and benefits. The costs include the social loss associated with seigniorage, the inability to conduct an independent monetary policy and the relative ineffectiveness of the exchange rate as an adjustment mechanism. The benefits of the MCP include limiting the use of inflation tax, and the stability induced by an effectively fixed exchange rate. Reversing the MCP cannot be achieved by enforcing the use of the kip, since this would be addressing the symptom rather than the underlying problems. The problems emanate from an underdeveloped monetary system, macroeconomic instability, and weak legal and institutional systems. When these problems are addressed, then the symptom, which is the MCP, will also cease to be a constraint.

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Comment(s)

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1. Eng Visal
   (posted 03 June 2010 / 09:06:51 PM)
   
   After reading your material it seems very interesting for me because I am also the one who live under dollarized economy. I am Cambodian citizen and now I am studying in Japan for my master degree. I have only one question regarding your discussion paper. How can you judge the cost is much higher than benefit of dollarization in Lao PDR? Any measurement or criteria to support that. Thank you and I am looking forward to hearing from you soon. ]
   
   
   with my best.
   
   visal
2. Peter Suskalio
   (posted 25 January 2007 / 08:25:51 AM)
   
   Good to see the ADB covering some of the smaller countries in Asia.
   
   Interesting read.
   
   Thanks
   
   Peter Suskalio
   Jakarta