Question

Compare the monetary policy of the 50 states that make up the United States to the exchange rate regime of dollarization.

Answer 1

Monetary policy in the US refers to the actions taken by the Federal reserve in order to promote maximum employment,stability in prices and moderate long term interest rate ..Monetary policy directly affects short term interest rate, indirectly it affects long term interest rate,exchange rates of currency, equity prices, and wealth and other assets in the economy. Thus it influences spending by households,investment made by businesses ,production in the economy,inflation in the economy etc.

In order to obtain currency stability , many countries have tried to peg their own currency to the US dollar .Again some countries fully give up their currency and adopt the US dollar . This is dollarization. Due to pegging local currency gets the same value as US dollar and the exchange rate gets stabilized..But in comparison to the monetary policy of US , the pegged currency loses its ability to directly influence the economy and also does not have the right to use the monetary policy and any exchange rate regime.The central bank or the government of that country cannot get the profit by issuing currency and the US Federal reserves gets the profit and GDP of that country gets affected.In a dollarized economy the central bank cannot act as lender of last resort.