Given Central America’s geographical proximity to the US and the fact that seven million Central Americans out of a total regional population of 40 million – 17.5% – live and work in the US, it is no wonder that the dollar rests deep in the region’s psyche. Central bankers and policy makers struggle with the implications of this as they try to make their economies perform better.
Economic textbooks talk about two kinds of dollarisation: that with formal legal approval, in which the dollar replaces the national currency; and the unofficial kind, when residents’ use of dollars for a mass of transactions leads to a dual currency situation. Central America has examples of both types and the region’s experience shows that both outcomes bring policy challenges.
