Question

Why would a nation “dollarize”—that is, adopt another country’s currency instead of having its own?

Short answer

Because of dollarization nations, economic stability increases and it eliminates currency risk.

Step-by-step solution

Step 1. Define dollarization.

The practise of a country utilising another country's currency in addition to or instead of its own is known as dollarization.

Step 2. Explanation of final answer.

Dollarization is the practice of a country using another country's currency in addition to or instead of its own. Some small countries, for example, utilize the currency of their larger neighbors because it is impracticable to maintain a separate currency; for example, the Swiss franc is being used by Liechtenstein.

When a country dollarizes or accepts the currencies of some other country, it gains the following benefits:

• Dollarization improves economic stability by almost eliminating currency risk.
• It safeguards against inflationary pressures.
• It provides a consistent accounting unit throughout borders.
• It lowers the likelihood of capital flight.
• It allows banks to retain fewer assets because the demand for currency conversion is decreased;
• It reduces the cost of converting one currency for another.
• It allows for increased economic transparency and openness, among other things.

As a result, the preceding arguments explain why a country would dollarize.